<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL REPORT AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23124
------------------------
ANCHOR GAMING
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 88-0304253
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
</TABLE>
815 PILOT ROAD
SUITE G
LAS VEGAS, NEVADA
89119
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (702) 896-7568
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------------- ---------------------------------------------------
<S> <C>
COMMON STOCK, $.01 PAR VALUE THE NASDAQ STOCK MARKET'S NATIONAL MARKET
</TABLE>
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: / /
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at September 22, 1998, based on the $63.50 per
share closing price for the Company's common stock on the Nasdaq National
Market, was approximately $538,733,238.
The number of shares of the Registrant's Common Stock outstanding as of
September 22, 1998 was 12,423,532.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on or about November 23, 1998 (to be filed)
are incorporated by reference into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ----------- -----
<C> <S> <C>
PART I
1 Business...................................................................................... 1
2 Properties.................................................................................... 23
3 Legal Proceedings............................................................................. 23
4 Submission of Matters to a Vote of Securityholders............................................ 23
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters......................... 24
6 Selected Financial Data....................................................................... 25
7 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 27
8 Financial Statements and Supplementary Data................................................... 34
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 50
PART III
10 Directors and Executive Officers of the Registrant............................................ 50
11 Executive Compensation........................................................................ 51
12 Security Ownership of Certain Beneficial Owners and Management................................ 51
13 Certain Relationships and Related Transactions................................................ 51
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 51
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Anchor Gaming ("Anchor" or the "Company") is a diversified gaming company
that seeks to capitalize on its experience as an operator and developer of
gaming machines and casinos by developing gaming oriented businesses. Anchor
develops and distributes unique proprietary games, operates two casinos in
Colorado, and operates a gaming machine route in Nevada. Anchor operates through
wholly owned subsidiaries, Anchor Coin, C.G. Investments, Inc, and D D Stud,
Inc. and one 80% subsidiary, Colorado Grande Enterprises, Inc. References in
this Annual Report on Form 10-K to Anchor or the Company include subsidiaries
unless the context requires otherwise.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and other applicable securities laws. All statements other
than statements of historical fact are "forward-looking statements" for purposes
of these provisions, including any projections of earnings, revenues, or other
financial items; any statements of the plans, strategies, and objectives of
management for future operation; any statements concerning proposed new
products, services, or developments; any statements regarding future economic
conditions or performance; statements of belief; and any statement of
assumptions underlying any of the foregoing. Such forward-looking statements may
be contained in the Company's business description and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, among
other places. Although the Company believes that the expectations reflected in
any of its forward-looking statements will prove to be correct, actual results
could differ materially from those projected or assumed in the Company's
forward-looking statements. The Company's future financial condition and
results, as well as any forward-looking statements, are subject to the inherent
risks and uncertainties that are described from time to time in the Company's
reports filed with the Securities and Exchange Commission. See "Risk Factors" in
addition to the other information in this Annual Report. The Company undertakes
no obligation to update any forward-looking statement.
PROPRIETARY GAMES
GENERAL. Anchor develops proprietary games, which it markets to
unaffiliated casinos and uses in its own gaming operations. The Company's
strategy is to develop games that provide casinos with a higher win per machine
than their existing gaming devices while generating recurring revenues to the
Company from royalty, revenue participation, fixed daily rental fee, or other
similar agreements. Although the Company initially developed proprietary games
as a complement to its own gaming machine operations, since February 1993 the
Company has been actively marketing its proprietary games to unaffiliated
casinos. The Company currently provides proprietary games to virtually every
major casino in the United States, as well as to the two casinos it owns in
Colorado. In September 1996, the Company entered into a strategic alliance (the
"Strategic Alliance") with International Game Technology ("IGT"), the largest
manufacturer of computerized gaming casino products, to enhance the Company's
ability to develop and distribute proprietary games. Through the Strategic
Alliance, the Company and IGT have formed a joint venture (the "Anchor IGT JV")
to develop, integrate, and distribute proprietary game concepts, primarily on
wide area progressive systems ("WAPs").
The Company, seeking to capitalize on its established sales and marketing
infrastructure, its base of existing casino customers, and its licenses in
virtually all major domestic gaming jurisdictions, has been actively developing
proprietary games, which can be classified as either a dedicated proprietary
game, a proprietary game on a WAP, or a converted proprietary game. The
Company's proprietary games are designed to increase gaming customer play levels
by either enticing the customer to play longer or to wager
1
<PAGE>
more coins per play. The Company believes that an opportunity exists to further
expand and develop the market for proprietary games distributed on a royalty,
revenue participation, fixed daily rental fee, or other similar basis.
DEDICATED PROPRIETARY GAMES. The Company has successfully developed or
acquired the rights to ten proprietary games that are currently installed and
approved for use in unaffiliated casinos. Anchor's dedicated proprietary games
include Double Down Stud, Silver Strike, Clear Winner, Wheel of Gold, Totem
Pole, Rock'N'Reels, CashBall, Wheel Poker, Crazy Joker Poker, and SafeBuster.
All of the machines are placed in casinos free of any initial charge allowing
the casino to avoid up-front purchase costs and providing recurring revenues to
Anchor under royalty, revenue participation, fixed daily rental fee, or other
similar agreements. The machines utilize numerous unique concepts and designs in
order to increase overall gaming customer play levels. For example, the
Company's two most popular dedicated proprietary games, Totem Pole and Wheel of
Gold, each incorporate innovative game features that contribute to higher play
levels. Totem Pole comprises three games in one slot machine creating a unique
visual presentation in the casino environment. Greater play levels are realized
on Totem Pole because the player must insert the maximum number of coins to
activate all three games and benefit from the addition of a "wild" symbol.
Players on the Wheel of Gold machine have the opportunity to activate on the
same machine a three dimensional "roulette" type wheel with significantly higher
potential winnings, providing a secondary game event and additional excitement
to the customer through the Company's "game within a game" concept. Anchor's
"game within a game" concept provides the player an incentive to increase play
through the secondary game event, thereby maximizing customer playing time.
WAP PROPRIETARY GAMES. A WAP is a system that electronically links
individual slot machines among multiple locations, allowing all the machines to
share a common jackpot. The WAP jackpot increases, or progresses, by a certain
percentage of each coin inserted into any one of the machines on the WAP
network, thereby allowing the jackpot to increase rapidly to a significant
amount. Management believes that the large jackpots offered by WAP machines
attract a distinct portion of a customer's gaming budget as compared to a
non-progressive slot machine. In order to capture this portion of a customer's
gaming budget, the Company entered into the Strategic Alliance resulting in the
Anchor IGT JV for the purpose of developing and installing WAP machines based on
both existing dedicated proprietary games and other game designs. The Company
and IGT share in the management of the Anchor IGT JV and share equally in its
profits and losses. The first WAP machine introduced by the Anchor IGT JV is the
Wheel of Fortune, a game that is very similar to the Company's Wheel of Gold.
Additionally, the Anchor IGT JV has introduced Wheel of Gold, Totem Pole, and
Pinball Mania on a WAP.
CONVERSION OPPORTUNITY. The Company's first proprietary game was the video
poker game Double Down Stud, a software conversion kit that the Company installs
in existing third party casino gaming machines. The enhancement created by the
installation provides the Company a daily royalty for each converted machine.
Management believes that as casinos experience pressure to increase "same store
sales" they will seek to enhance the performance of their installed base of
machines by adding new features by means of conversion kits. The Company is
currently developing technology to allow older generation slot machines to
utilize additional features such as the "game within a game" concept.
2
<PAGE>
The following is a description of proprietary games that the Company is
currently distributing.
<TABLE>
<S> <C>
- - Double Down Stud........... Double Down Stud is a software conversion kit introduced in
1993 that is installed in casino customers' gaming machines
to allow players to play a unique version of video poker.
- - Silver Strike.............. Silver Strike is a standard slot machine that pays out
souvenir tokens for certain winning combinations. Anchor
furnishes Silver Strike machines free of any initial charge
to its casino customers, who agree to purchase the souvenir
tokens exclusively from the Company.
- - Clear Winner............... Clear Winner is a standard slot machine introduced in 1995
that is remanufactured into a clear cabinet so that players
can observe all of its inner workings. The game includes
state of the art signage and a custom designed cabinet.
- - Wheel of Gold.............. Wheel of Gold is a standard slot machine introduced in 1995
that has the added dimension of giving players the
opportunity to activate on the same machine a
three-dimensional roulette type wheel. This provides the
player with significantly higher potential winnings and
additional excitement through the Company's game within a
game concept.
- - Totem Pole................. Introduced in 1996, Totem Pole incorporates three games in
one device, each of which is activated by inserting
additional coins. Each successive game played provides the
possibility of greater payback to the player.
- - Rock'N'Reels............... Introduced in 1996, Rock'N'Reels is a specially packaged
standard slot machine designed to evoke the image of a
vintage jukebox. The game is enhanced with state of the art
sound and signage.
- - CashBall................... Introduced in 1998, CashBall is a standard slot machine that
has the added dimension of giving players the opportunity to
activate, on the same machine, an actual working pinball
game. This provides the player with significantly higher
potential winnings and excitement through the Company's
"game within a game" concept.
- - Wheel Poker................ Wheel Poker is a standard video poker game introduced in
1998 that, in the tradition of our Wheel of Gold game, has
given the player the added opportunity to activate the
three-dimensional "roulette type" wheel. Again, this
provides the player with significantly higher potential
jackpots and excitement through the Company's "game within a
game" concept.
- - Crazy Joker Poker.......... Introduced in 1998, Crazy Joker Poker is a standard video
poker machine with an added bonus. The Crazy Joker is a
randomly appearing wild symbol, which the player can choose
when to use.
- - SafeBuster................. SafeBuster is a standard reel slot machine introduced in
1998 which, as an added bonus, turns a combination dial
after each non-winning reel spin, offering a positive player
experience with each handle pull. Crack the combination and
receive free spins until a winner is hit and multiplied by
up to 10 times.
</TABLE>
The Company derives recurring revenues on these machines in various forms,
including daily or similar royalties, revenue participation, fixed daily rental
fees, or other similar agreements with casinos, and, in the case of Silver
Strike, by selling the souvenir tokens to casinos.
3
<PAGE>
DEVELOPMENT. Anchor is continually engaged in the development of new
proprietary games and in the improvement of existing games. After the Company
has identified the basic concept for a new game, it works to refine the new game
to maximize player appeal. The Company's efforts include computer simulated
studies of the game probabilities to determine the optimal pay schedules;
research of, and application for, any significant intellectual property rights
that can be claimed; design of packaging for the game; establishment of a
pricing strategy for the game; and application for the necessary regulatory
approvals. Anchor then solicits feedback from potential casino customers to
further refine the game. At the production stage, Anchor and the manufacturer
refine the technology and construction of the game. Prior to the release of any
new game, Anchor must receive necessary regulatory approvals. During the year
ended June 30, 1998, Anchor added a Research and Development Department and
acquired an Engineering Group to enhance its ability to develop new proprietary
game concepts.
DISTRIBUTION. Anchor has an established sales organization with offices in
Nevada, Missouri, Mississippi, Louisiana, Indiana and New Jersey servicing an
established customer base of over 250 casinos at June 30, 1998. The Company
distributes its proprietary games primarily through a direct sales effort in
which sales representatives call on casinos and other potential customers.
Anchor also uses distributors in a limited number of jurisdictions.
ANCHOR IGT STRATEGIC ALLIANCE. In September 1996, the Company entered into
the Strategic Alliance. The Company believes that the Strategic Alliance will
facilitate both the expansion of their proprietary games business and the
Company's ability to develop and distribute additional proprietary games on a
WAP.
As part of the Strategic Alliance, Anchor and IGT have formed the Anchor IGT
JV. The Company and IGT share in the management and share equally in its profits
and losses. IGT's WAP system is being used within the Anchor IGT JV for a
variety of the Company's dedicated proprietary game concepts including Wheel of
Gold, Totem Pole, and CashBall. IGT's Wheel of Fortune game is also covered
under the Strategic Alliance. Property, including intellectual property,
developed through the joint venture is owned by the Anchor IGT JV. The joint
venture agreement has an initial duration of ten years and terminates unless the
parties thereto agree to an extension. After the initial ten year term, either
party may terminate the joint venture upon at least one year's prior notice. The
Anchor IGT JV does not acquire any rights to the intellectual property rights of
each of Anchor and IGT that are developed outside of the joint venture. In the
event that any particular state jurisdiction prohibits the equal share of
profits and losses, management responsibility, or allocation of expenses in the
Anchor IGT JV, alternative arrangements are made to satisfy regulatory
requirements.
INTELLECTUAL PROPERTY RIGHTS. Anchor has secured and endeavors to secure,
to the extent possible, exclusive rights in its games, primarily through federal
and foreign intellectual property rights, such as patents and trademarks. The
United States Patent and Trademark Office has issued several patents to Anchor,
including (1) four patents which expire on March 31, 2009 covering the Double
Down Stud games in the United States; (2) one patent which expires on March 14,
2012 covering innovations of the Silver Strike game (but there is no independent
protection of the game itself); (3) one patent which was issued in 1993,
relating to a system it developed that allows players of gaming devices to
participate in a group game, such as bingo, without leaving the gaming device
they are playing; (4) one patent which expires July 11, 2112 covering the Crazy
Joker "traveling wild card" concept; and (5) one patent which expires on October
18, 2011 related to the game Player's Choice 21. In order to protect potential
foreign sources of income, the Company has filed patent applications and
trademark applications in strategically selected foreign countries. There can be
no assurance that any of the pending U.S. or foreign patent or trademark
applications will issue as patents or trademark registrations, respectively, or
that any of these rights will not be infringed by others or that already issued
patents or trademark registrations will not be invalidated or canceled. None of
the foregoing measures provides assurance that Anchor's proprietary games or the
concepts incorporated in the games could not be successfully duplicated by third
parties. Third parties
4
<PAGE>
could infringe on Anchor's rights, or Anchor's proprietary games could be
successfully duplicated without infringing on Anchor's legal rights. Many
elements incorporated in Anchor's proprietary games are in the public domain or
otherwise not susceptible to legal protection, and the steps taken by Anchor
will not, in and of themselves, preclude competition with Anchor's proprietary
games.
Clear Winner-Registered Trademark-, Colorado Central Station
Casino-Registered Trademark-, Colorado Grande-Registered Trademark-, Double Down
Stud-Registered Trademark-, Fast Track Express-Registered Trademark-, Silver
Strike-Registered Trademark-, and Spin for Cash-Registered Trademark- are
registered trademarks, and Anchor Coin-TM-, Anchor Games-TM-, Anchor Gaming-TM-,
Bang For A Buck-TM-, Big Bucks Bingo-TM-, Big Slot-TM-, CashBall-TM-, Casino
Bowling-TM-, Crazy Joker-TM-, Fast Cash Giveaway-TM-, Keno Bucks-TM-, Maggie's
Slot Club-TM-, Players Choice 21-TM-, Push Your Luck-TM-, Race to Riches-TM-,
Rock'N'Reels-TM-, Spin, Rattle and Roll-TM-, Spin The Wheel-TM-,
Tic-Tac-Disco-TM-, Totem Pole-TM-, Wheel & Deal-TM-, Wheel Poker-TM-, Wheel of
Gold-TM- and Wheel Winner-TM- are trademarks of Anchor Gaming. IGT-TM-, Wheel of
Fortune-TM- and SafeBuster-TM- are trademarks of their respective owners. There
can be no assurance that any pending trademark or patent applications will be
issued, that the Company's applications will not be opposed by a third party, or
that Anchor will not face third parties' claims to prior use of one or more of
these marks or patents.
CASINOS
GENERAL. In November 1990, the state of Colorado approved limited stakes
gaming ($5.00 or less per wager) in two historic gold mining areas, Black
Hawk/Central City and Cripple Creek. Because of the $5.00 maximum bet, Anchor's
casinos in Colorado emphasize gaming machine play. Anchor currently operates a
casino in each of these markets, the Colorado Central Station Casino in Black
Hawk and the Colorado Grande Casino in Cripple Creek. Black Hawk and Central
City are contiguous and are located approximately 40 miles from Denver and 10
miles from Interstate 70, the main highway connecting Denver to many of
Colorado's major ski resorts. Cripple Creek is located approximately 45 miles
from Colorado Springs and 75 miles from Pueblo. Casinos located in the Black
Hawk/Central City area serve primarily the residents of Denver and Boulder,
Colorado and surrounding communities, an area with a total population in excess
of 1.8 million. Approximately three million people live within a 100-mile radius
of the Black Hawk/Central City area. Casinos located in Cripple Creek serve
primarily the residents of Colorado Springs, Pueblo, and surrounding
communities. More than two million people live within a 100-mile radius of
Cripple Creek.
COLORADO CENTRAL STATION CASINO. On December 25, 1993, the Company opened
the Colorado Central Station Casino in Black Hawk at an initial cost of
approximately $25.0 million. The Colorado Central Station Casino is one of the
highest revenue producing and one of the most profitable casinos in the state.
After completion of a 2,750 square foot expansion in 1996, the casino building
has approximately 49,000 square feet of main facility area, with 16,637 square
feet of gaming space over three floors. The Colorado Central Station Casino
features more than 700 gaming machines, ten blackjack tables, nine poker tables,
and a food court restaurant area. The casino benefits from a favorable location,
as it is the first casino encountered by customers traveling from Denver to the
Black Hawk/Central City area. In addition, the Colorado Central Station Casino
offers more than 600 parking spaces. The Colorado Central Station Casino is also
the closest casino to Black Hawk's 3,000 space public parking facility, located
one and one-half miles from the casino, and is the first stop from the parking
facility on the parking lot shuttle bus route. The Colorado Central Station
Casino is situated on approximately 1.8 acres of land on the south end of Black
Hawk, near Main Street and Colorado State Highway 119.
The Colorado Central Station Casino is fashioned in the style of a 19th
century mining town railroad station. According to information on file with the
Colorado Historic Preservation Office, the Colorado Central Station Casino
property is within the Black Hawk Registered Historic District and meets the
historical guidelines for use as a gaming establishment. The Colorado Central
Station Casino was constructed specifically for gaming activities, and as a
result offers an open, spacious gaming area, while using the maximum square
footage allowed under Colorado law, which limits the square footage of a casino
that may be used for gaming activities to 35% of the building and 50% of any one
floor. At June 30,
5
<PAGE>
1998, the Colorado Central Station Casino employed approximately 425 people and
by law is allowed to be open seven days a week from 8:00 a.m. to 2:00 a.m. All
gaming machines at the Colorado Central Station Casino offer bill validators
that accept $1, $5, $10, $20, $50, and $100 bills. In addition, the Company has
installed an automated player tracking system at the casino that is tied into
the Company's accounting system to provide detailed management reports regarding
gaming machine use. The system facilitates the casino's Fast Track Slot Club,
which is designed to attract and retain gaming patrons by enabling the Company
to identify, market to, and reward its loyal customers.
COLORADO GRANDE CASINO. The Company operates (through an 80% owned
subsidiary) the Colorado Grande Casino in Cripple Creek, which is located
approximately 45 miles from Colorado Springs and 75 miles from Pueblo. The
Colorado Grande Casino, which opened October 11, 1991, is located at one of the
principal intersections in Cripple Creek and features more than 210 gaming
machines, 44 adjacent parking spaces, and a full service restaurant and bar. In
August 1995, the Company completed the installation of an automated player
tracking system and a player slot club, "Maggie's Slot Club." Maggie's Slot Club
and the player tracking system have enabled the casino to implement marketing
programs designed to attract and increase the number of loyal casino customers.
At June 30, 1998, the Colorado Grande Casino employed approximately 98 people
and by law is allowed to be open seven days a week from 8:00 a.m. to 2:00 a.m.
ROUTE OPERATIONS
Anchor is one of the largest gaming machine route operators in Nevada with
842 gaming machines in 60 locations at June 30, 1998, up from 801 gaming
machines in 58 locations at June 30, 1997. The Company's gaming machine route
operations in Nevada involve the installation, operation, and service of gaming
machines (virtually all video poker machines) under space leases with retail
chains and under revenue participation agreements with local taverns and retail
stores, principally in the Las Vegas area. Management believes that the
Company's route operation contracts provide the Company with a long-term, stable
revenue source and that its route has the highest revenue and profit per machine
of any route operation in the state of Nevada. In 1996, the Company extended its
exclusive space lease agreement with Smith's Food and Drug Centers, Inc.
("Smiths"), it's largest route customer, for an additional five years at current
rates through 2010. At June 30, 1998, 753 of the Company's 842 gaming machines
in Nevada were located in or near Las Vegas, which has been one of the fastest
growing cities in the United States in recent years.
Anchor's agreements for its locations generally are in the form of either
written space lease agreements or revenue sharing contracts and generally give
Anchor the exclusive right to install gaming machines at such locations. Two of
the Company's gaming route agreements are space leases with major retail chains
that require payments of fixed monthly fees based on the amount of space used or
the number of gaming machines installed at each location. The remainder of the
Company's gaming route agreements are revenue participation arrangements, which
provide for the payment to the location owner of a percentage of revenues
generated by Anchor's machines at such location. A location owner is not
permitted to receive a percentage of revenues unless such owner is licensed by
the Nevada Gaming Commission. See "Regulation--Nevada."
Anchor's space lease agreement with its largest gaming machine route
customer, Smiths, runs through the year 2010 at current rates. The agreement
with Smiths provides for a fixed monthly rental fee per store throughout the
term of the agreement and grants Anchor the exclusive right to install gaming
machines at all Smiths stores in Nevada, including stores opened in the future.
Anchor's space leases and revenue participation arrangements generally
require Anchor to pay all installation, maintenance, and insurance expenses
related to its operations at each location. Applicable taxes are paid by Anchor
under space leases and are generally shared on the same basis as revenues under
revenue participation arrangements. The leases generally provide that if Anchor
fails to pay the required rental or license fees or defaults in the performance
of any of its other obligations, the location operator
6
<PAGE>
can terminate the lease. Anchor believes that it is not in default under any of
its present space leases or revenue participation arrangements. Generally, in
the ordinary course of business, Anchor has lease and other security deposits,
prepaid rent, and advances held by the owners of chain stores and other location
operators.
Anchor attempts to attract and retain gaming machine route patrons by
offering an attractive selection of gaming machines. Prior to installing
machines at a location, Anchor studies the market potential and customer base
and determines the appropriate machine mix for the location. Progressive
jackpots are also offered at most of the Company's locations. Virtually all of
the gaming machines operated by the Company's route operation are video poker
machines because Anchor believes that interactive electronic games, such as
video poker, are more attractive to its gaming machine route patrons than
simple, mechanical reel-type slot machines.
In marketing its services to the owners of retail stores and taverns, the
Company also emphasizes quality service. The Company operates and services its
machines using its own employees, who routinely repair and maintain the
Company's gaming machines in order to improve reliability and in-service time.
Management believes that the Company's gaming machines and related equipment are
well maintained and in good working condition. In addition to physical service
of the gaming machines, employees of the Company remove coins and bills from the
machines, refill machines that have exhausted their supply of coins, and provide
payment of jackpots in excess of machine limits. Anchor also operates change
booths at certain of its retail store locations.
SUPPLIERS
Anchor has contracted with several manufacturers to develop both Anchor's
existing and future product requirements. To date, the Company has purchased
substantially all of the gaming machines used in its route operations from IGT.
Silver Strike machines are currently manufactured by either IGT or Sigma Game,
Inc. The primary components of Wheel of Gold, Wheel Poker and CashBall are
manufactured by Bally Gaming International, Inc. Totem Pole was originally
manufactured for the Company by Universal Distributing of Nevada, Inc. Since
that time, the Company has also contracted with Bally Gaming International, Inc.
and IGT for the manufacture of Totem Pole. Crazy Joker Poker machines are
currently manufactured by Williams Gaming and SafeBuster machines are currently
manufactured by Casino Data Systems. The Company is expected to continue its
reliance on third parties for the manufacture of its proprietary games. An
inability to obtain quality gaming machines, production parts, and replacement
parts on reasonable terms or on a timely basis could have an adverse effect on
Anchor. See "Risk Factors--Risks of Dependence on Suppliers."
COMPETITION
Anchor is subject to intense competition in all of its markets, and
management believes that national, regional, state, and local competition in the
gaming industry in general will be extremely high during the foreseeable future,
as gaming activities continue to expand in both traditional and new gaming
jurisdictions. In addition, many of the Company's competitors have greater
financial resources than the Company. See "Risk Factors--Competition."
PROPRIETARY GAMES. Intense competition characterizes the market for
proprietary games. Management believes that the primary bases for competition in
the casino game market are price and potential profit to gaming location
operators that install the games. The perceived popularity of games with casino
patrons as well as the economics of the game are, management believes, factors
considered by potential casino customers. The popularity of any of the Company's
games may decline over time as consumer preferences change or as new, competing
games are introduced. As a result, Anchor must continually adapt its products to
consumer preferences to maximize the economics of the game to the Company. There
can be no assurance, however, that Anchor will continue to be successful in
developing and
7
<PAGE>
marketing its products. If the Company fails to develop games that achieve
market acceptance or if existing games become obsolete due to the introduction
of popular games by Anchor's competitors the effects on Anchor could be material
and adverse. Competitors in the game industry include manufacturers of gaming
devices and other companies marketing gaming products and conversion kits that
compete directly with the Company for the limited gaming spaces available at
casinos.
Anchor's strategy of creating recurring revenues from its proprietary games
by placing the games in casinos under a royalty, revenue participation, fixed
daily rental fee, or similar agreements involves a departure from the
traditional practice of casinos purchasing gaming devices. To the extent that
casinos are reluctant to, or decide not to, enter into arrangements that
generate recurring revenues for suppliers of casino games, the market for
Anchor's proprietary games could be limited, or discontinued if casino operators
decide to reject Anchor's revenue sharing model. Competition within the market
for games that generate recurring revenues could intensify as other suppliers of
gaming devices enter this market or offer competitive products or terms.
CASINOS. Intense competition also characterizes the Black Hawk/Central City
and Cripple Creek markets. Since limited stakes gaming was instituted in
Colorado in 1991, a number of Colorado casinos have ceased operations and others
have filed for protection under Chapter 11 of the Bankruptcy Code. Others have
closed temporarily or reduced the number of employees, and many casinos may not
be operating profitably. Several proposals have been made to open new casinos or
to expand existing casinos in Black Hawk, some of which have been abandoned or
modified.
In June 1998, a joint venture between Black Hawk Gaming & Development
Company, Inc. and Jacobs Entertainment Ltd. commenced casino operations, "The
Lodge," which includes 800 slot machines, 20 table games, and 500 parking
spaces. Two casinos are being developed in Black Hawk located across the
intersection from the Company's Colorado Central Station Casino. Casino America
and Nevada Gold & Casinos have commenced construction of a casino scheduled to
open in late 1998 or early 1999, which is expected to include 1,100 slot
machines, 24 table games, and a 1,000 car parking garage. Riviera Holdings
Corporation has also commenced construction of a casino scheduled to open in
late 1999, which is expected to include 1,000 slot machines, 14 table games, and
a 500 space covered parking garage. Black Hawk Brewery has commenced
construction of a casino, located next to Colorado Central Station, scheduled to
open in late 1999 which is expected to include 600 slot machines, 10-20 table
games and 500 parking spaces. Fitzgeralds has also announced an expected
expansion of approximately 50% of their current gaming area as well as a 70-80
room hotel. Potential projects include the Hyatt, which would include 800-1,000
slot machines and the Dakota Works project, which would include approximately
1,000 slot machines. Competition from these entrants to the market could have a
material adverse effect on the Company.
It appears that national, regional, state, and local competition for the
casino gaming market in general will remain extremely high during the
foreseeable future, as casino gaming activities expand in traditional gaming
states and in new jurisdictions. In addition, passage of the Indian Gaming
Regulatory Act in 1988 has led to rapid increases in Native American gaming
operations, and the Company's two casinos may compete for customers with casinos
located on Indian reservations in far southwestern Colorado. The Company expects
many competitors to enter new jurisdictions that authorize gaming, some of whom
may have greater financial and other resources than the Company. Such
proliferation of gaming activities could adversely affect the Company's
business. In particular, the legalization of casino gaming in or near any
metropolitan area, such as Denver, Colorado, from which the Company draws
customers would have a material adverse effect on the Company's business. The
Company believes, however, that proliferation of gaming activities into new
jurisdictions presents an opportunity for it to expand its proprietary games
operations.
Colorado law requires an amendment to the State Constitution followed by
local voter approval for any expansion of limited stakes gaming. State and local
public initiatives regarding limited gaming in
8
<PAGE>
Colorado are being actively pursued by many persons. Several cities within
Colorado have active citizens' lobbies that were able to place limited gaming
initiatives on the November 1994 and November 1996 statewide ballot. Although
these initiatives failed by substantial margins, new initiatives could be
introduced on future statewide ballots to allow expansion of gaming in Colorado.
Future initiatives, if passed, could significantly increase the competition for
gaming customers, thereby adversely affecting Anchor's current casino operations
in Colorado. In addition, Anchor's casinos in Colorado compete with casinos in
other parts of the United States, as legalized gambling continues to
proliferate.
ROUTE OPERATIONS. Gaming machines and gaming of all types are available in
Nevada casinos and in restricted gaming locations similar to those in which the
Company operates gaming machines, and all of these gaming establishments compete
directly or indirectly with Anchor's route operations. In addition, Anchor is
subject to substantial competition for the operation of gaming machines in
approved locations from numerous small gaming machine route operators and some
large operators, located principally in Las Vegas and Reno, Nevada, and their
surrounding areas. The principal methods of competition for gaming machine
locations are the lease, sublease, license, or revenue sharing terms, the
service provided by the route operator, the reputation of the route operator,
and the financial strength of the route operator. As existing space lease and
revenue participation arrangements expire, competition for renewals can be
expected to increase the amounts payable to location owners as compared to
amounts payable under existing agreements. Anchor's route is the only route
operation that features Double Down Stud, as the Company does not offer the game
to competing route operators. Providing a proprietary game in its route
operation is one of the ways Anchor differentiates itself from its competitors.
SECURITY
Anchor's casino and gaming machine route operations generate, and require
the Company to maintain, a large supply of available cash. In order to mitigate
the risks of loss associated with maintaining such a supply, the Company employs
physical security measures and utilizes strict internal accounting and custodial
controls on receipts and disbursements. There can be no assurance, however, that
the Company's precautions, internal controls, and physical security will provide
security for its employees or prevent cash shortages resulting from employee
errors or from theft. In addition, the Company maintains insurance to mitigate
this risk.
EMPLOYEES
At June 30, 1998, Anchor employed approximately 920 persons, the substantial
majority of whom are non-management personnel. Of this total, approximately 520
people worked at the Colorado Central Station Casino and the Colorado Grande
Casino. The balance of the Company's non-management employees are involved in
route and proprietary games operations. None of Anchor's employees are covered
by collective bargaining agreements, and Anchor believes that it has
satisfactory employee relations.
SEASONALITY
The Company's proprietary games operations typically have their highest
levels of business during the summer tourist season when its casino customers
experience heavier tourist traffic. Proprietary games operations within the
Anchor IGT JV, as well as within Anchor's proprietary games operations outside
of the Anchor IGT JV, during the winter months could be significantly affected
by inclement weather, road conditions and casino patron traffic patterns
throughout the gaming jurisdictions in which proprietary games are operated. In
general, the highest levels of business activity at its Colorado casinos occurs
during the tourist season from July to October of each year. In addition,
operations at the Colorado casinos during the winter months could be
significantly affected by weather and road conditions in Colorado. In general,
the highest levels of business activity in its Nevada Route operation occurs
during the summer periods, specifically April through September.
9
<PAGE>
REGULATION
NEVADA. The manufacturing and distribution of gaming devices and the
ownership and operation of gaming machine routes in Nevada are subject to (i)
the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act") and (ii) various local regulations. Generally,
gaming activities may not be conducted in Nevada unless licenses are obtained
from the Nevada Gaming Commission (the "Nevada Commission") and appropriate
county and city licensing agencies. The Nevada Commission, the Nevada State
Gaming Control Board (the "Nevada Board"), and the various county and city
licensing agencies are collectively referred to as the "Nevada Gaming
Authorities."
The laws, regulations, and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things, (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping, and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state and local
revenues through taxation and licensing fees. Changes in such laws, regulations,
and procedures could have an adverse effect on Anchor.
Anchor Coin, which is the Company's subsidiary engaged in the distribution
of gaming devices and route operations, is licensed by the Nevada Gaming
Authorities. Anchor Coin is also licensed as a manufacturer to enable it to
develop its proprietary games. Anchor Coin's gaming licenses require the
periodic payment of fees and taxes and are not transferable. Anchor is
registered by the Nevada Commission as a publicly traded corporation
("Registered Corporation") and, as such, is required periodically to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information that the Nevada Commission may require. No person may
become a stockholder of, or receive any percentage of profits from, Anchor Coin
without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and Anchor Coin have obtained from the Nevada Gaming
Authorities the various registrations, approvals, permits, and licenses required
in order to engage in gaming activities in Nevada.
Anchor Coin's operator's license enables it to operate gaming machines on
premises owned by others. At locations with 15 or fewer gaming machines, the
operation is considered to be a "restricted" gaming location. At locations with
more than 15 gaming machines, the operation is considered to be a "non-
restricted" gaming location. The non-restricted regulatory requirements are
reduced to some extent because no more than 35 gaming machines, and no table
games, are operated at this location. Slot machines operated at restricted and
non-restricted locations are subject to various fixed fees and per-machine taxes
levied on a quarterly and annual basis by the Nevada Gaming Authorities.
Non-restricted locations are subject to a tax on their gross revenues (the
difference between amounts wagered by casino patrons and payments to casino
patrons) that ranges from 3.0% to 6.25%. In its space lease agreements with
retail chains, Anchor has agreed to pay all taxes and fees relating to the
operation of gaming machines, and in its participation arrangements, taxes and
fees are typically shared on the same basis as revenues. Significant increases
in the fixed fees or taxes currently levied per machine or the tax currently
levied on gross revenues could have a material adverse effect on the Company.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Anchor
Coin in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors, and
certain key employees of Anchor Coin must file applications with the Nevada
Gaming Authorities and are required to be licensed by the Nevada Gaming
Authorities. Officers, directors, and key employees of the Company who are
actively and directly involved in the gaming activities of Anchor Coin may be
required to
10
<PAGE>
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing or a finding of
suitability for any cause they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities, and, in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or to have a continuing relationship with the
Company or Anchor Coin, the companies involved would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or Anchor Coin to terminate the employment of any person who refuses
to file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and Anchor Coin are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities, and similar financing transactions by Anchor Coin
must be reported to or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Anchor Coin, the
gaming licenses it holds could be limited, conditioned, suspended, or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, Anchor Coin, the Company, and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Further, a supervisor could be appointed by
the Nevada Commission to operate the Company's nonrestricted locations, and,
under certain circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of the Company's gaming
property) could be forfeited to the state of Nevada. Limitation, conditioning,
or suspension of any gaming license or the appointment of a supervisor could
(and revocation of any gaming license would) materially and adversely affect
Anchor.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his or her suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
state of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of
the Company's voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails a
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, that acquires more than
10% but not more than 15% of the Company's voting securities, may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
An institutional investor will not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter or bylaws, management, policies, or operations of the Company
or any of its gaming affiliates, or any other action that the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities that are not deemed to be inconsistent with
holding voting securities for investment purposes only include (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by
11
<PAGE>
securities analysts for informational purposes and not to cause a change in its
management, policies, or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities that must be found suitable is a
corporation, partnership, or trust, it must submit detailed business and
financial information including a list of its beneficial owners. The applicant
is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identity
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock of a Registered
Corporation beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or Anchor
Coin, the Company (i) pays that person any dividend or interest upon voting
securities of the Company; (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person;
(iii) pays remuneration in any form to that person for services rendered or
otherwise; or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his or her voting securities for cash at fair market value.
Additionally, the Clark County, Nevada Liquor and Gaming Licensing Board has
taken the position that it has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada that
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that such securities are subject to the Nevada Act. However,
to date, the Nevada Commission has not imposed such a requirement on the
Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire, or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby such person obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and the Nevada Commission
concerning a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors, and other persons
12
<PAGE>
having a material relationship or involvement with the entity proposing to
acquire control to be investigated and licensed as part of the approval process
of the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities, and corporate defense tactics
affecting Nevada gaming licensees and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
board of directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of the Licensees' participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are also required to comply with
certain reporting requirements imposed by the Nevada Act. Licensees are also
subject to disciplinary action by the Nevada Commission if they knowingly
violate any laws of the foreign jurisdiction pertaining to the foreign gaming
operation, fail to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations, engage
in activities that are harmful to the state of Nevada or its ability to collect
gaming taxes and fees, or employ a person in the foreign operation who has been
denied a license or a finding of suitability in Nevada on the ground of personal
unsuitability.
The placement and number of gaming machines that may be operated in various
locations are subject to limitation and control by local city and county laws
and ordinances. Acting through their zoning powers and their powers to regulate
gaming, local government entities determine the number of gaming machines that
may be operated at non-casino locations and the types of locations where gaming
operations may be conducted. Accordingly, changes in such local zoning laws and
ordinances could have a material adverse effect on Anchor.
COLORADO. The ownership and operation of gaming facilities in Colorado are
subject to extensive state and local regulation. No gaming may be conducted in
Colorado unless licenses are obtained from the Colorado Limited Gaming Control
Commission (the "Colorado Commission"). In addition, the State of Colorado
created the Division of Gaming (the "Colorado Division") within its Department
of Revenue to license, implement, regulate, and supervise the conduct of limited
stakes gaming. The Director (the "Colorado Director") of the Colorado Division,
under the supervision of the Colorado Commission, has been granted broad powers
to ensure compliance with the law and regulations. The Colorado Commission, the
Colorado Division, the Colorado Director, and city authorities in Black Hawk,
Central City, and Cripple Creek that have responsibility for regulation of
gaming are collectively referred to as the "Colorado Gaming Authorities."
The laws, regulations, and supervisory procedures of the Colorado Gaming
Authorities seek to maintain public confidence and trust that licensed limited
gaming is conducted honestly and competitively, that the rights of the creditors
of licensees are protected, and that gaming is free from criminal and corruptive
elements. It is the stated policy of the Colorado Gaming Authorities that public
confidence and trust can be maintained only by strict regulation of all persons,
locations, practices, associations, and
13
<PAGE>
activities related to the operation of licensed gaming establishments and the
manufacture or distribution of gaming devices and equipment.
The Colorado Commission is empowered to issue five types of gaming related
licenses. Anchor's casinos in Colorado each require a retail gaming license,
which must be renewed each year, and the Colorado Division has broad discretion
to revoke, suspend, condition, limit, or restrict a licensee at any time. No
person or entity can have an ownership interest in more than three retail gaming
licenses. The Colorado Grande Casino and the Colorado Central Station Casino
have each obtained the required retail gaming licenses.
In addition to retail gaming licenses for its casinos, all of Anchor's
casino employees involved in gaming activities must apply for and receive a
support gaming license prior to commencing employment. "Key" employees, which
are defined as any executive, employee, or agent of a licensee having the power
to exercise a significant influence over decisions concerning any part of the
operations of any licensee, must obtain key licenses. At least one key license
holder must be on the premises of each casino at all times. Anchor pays the cost
of obtaining and maintaining key licenses. All licenses are revocable,
nontransferable, and valid only for the particular location initially
authorized, except that support and key employee licenses move with the approved
individual and are not location specific.
Any person or group of related persons that acquires beneficial ownership of
between 5.0% and 9.99% of the outstanding Common Stock must report the
acquisition to the Colorado Commission within ten days of acquiring such
interest and may be required to provide additional information to the Colorado
Commission and be found suitable. Any person or group of related persons that
acquires beneficial ownership of 10% (or, with respect to institutional
investors, 15%) or more of the outstanding Common Stock must apply to the
Colorado Commission within 45 days after acquiring such interest and submit to
investigation for suitability by the Colorado Commission. Certain qualifying
institutional investors, at the Colorado Commission's discretion, may acquire up
to 15% ownership before a finding of suitability is required if such investors
provide certain information to the Colorado Commission regarding investment
intent and other matters. In order to be found suitable, a stockholder must be a
person of good moral character, honesty, integrity, and, in general terms, must
be free from previous criminal or unsavory convictions or similar acts. The
Colorado Commission may require substantial information in connection with a
suitability investigation, including personal background and financial
information, source of funding information, and a sworn statement that such
person or entity is not holding the Common Stock for any other party, and also
may require fingerprints. Until a finding of suitability occurs for a
stockholder who is undergoing a suitability investigation, Anchor cannot pay any
dividends to such stockholder nor may the stockholder exercise any voting rights
with respect to the Common Stock. A stockholder that is found to be unsuitable
must transfer its Common Stock to a suitable person within 60 days after the
finding of unsuitability. Otherwise, Anchor may offer such person the lesser of
the cash equivalent of such person's investment in the Common Stock or the
current market price of the Common Stock as of the date of the finding of
unsuitability, and the stockholder will be required to sell his or her Common
Stock to Anchor. Anchor's Articles of Incorporation include a statement that all
transfers of voting securities are subject to the regulations of the Colorado
Commission and each other regulatory body to which the Company's activities are
subject and detail the possibility of a repurchase if a stockholder is found
unsuitable.
The Colorado Commission has adopted comprehensive rules and regulations that
require Anchor to maintain adequate books and records and prescribe minimum
operating, security, and payoff procedures. Regulated operating procedures
include hours of operation and rules of play. Rules regarding gaming, cheating,
and fraudulent practices have also been adopted, which Anchor is obligated to
police and enforce. Upon request, Anchor must submit copies of all written
gaming contracts and summaries of all oral gaming contracts to which it is a
party or intends to become a party. Anchor and its subsidiaries must also
promptly inform the Colorado Commission of any change in their officers or
directors and any such new officer or director will be subject to possible
investigation prior to approval. Further, if any casino
14
<PAGE>
employee possessing a support license changes employment, is terminated, or
resigns, Anchor must notify the Colorado Director.
Anchor may not make a public offering of its securities without notifying
the Colorado Commission. The notification must occur within 10 business days
after the initial filing of a registration statement with the Securities and
Exchange Commission or, if the offering will not be registered with the
Securities and Exchange Commission, 10 days prior to the public use or
distribution of any offering document. The notification procedures apply to any
offering by Anchor where the proceeds will be used or intended for use (i) in
constructing gaming facilities; (ii) in financing the operation of gaming
facilities by any licensee; (iii) in acquiring any direct or indirect interest
in Colorado gaming facilities; or (iv) in retiring or extending obligations
incurred for any of the above purposes. The notification must disclose, among
other things, a description of the securities to be offered, the proposed terms
of the offering, its anticipated gross and net proceeds, and the use of the
proceeds.
Colorado law requires statewide voter approval of an amendment to the State
Constitution for any expansion of limited gaming into additional locations,
increase in limitations on the $5 wager, or the addition of games other than
blackjack, poker and slot machines. If a statewide vote is successful, the law
requires, in addition, voter approval from the locality in question. In 1994,
Colorado voters defeated by a margin of 93% to 7% a proposal to permit gaming in
Manitou Springs (located near Colorado Springs and Cripple Creek) and slot
machines in airports. On November 5, 1996, Colorado voters defeated by a margin
of 69% to 31% a proposal to allow gaming in the community of Trinidad, located
on the New Mexico border. Recently, the state legislature passed, but the
Governor vetoed, a bill that would have permitted video lottery terminals at dog
and horse racetracks under certain terms and conditions. Several cities within
Colorado have active citizens' lobbies that were able to place gaming
initiatives on recent statewide ballots. Although these initiatives have failed,
new initiatives could be introduced on future statewide ballots to allow
expansion of gaming in Colorado or prohibit gaming in the particular markets in
Colorado where the Company operates. Future initiatives, if passed, could
significantly increase the competition for gaming customers, thereby adversely
affecting the Company's operations in Colorado. Additionally, there can be no
assurance that future legislation will not be enacted that would impose
additional restrictions or prohibitions on, or assess additional fees with
respect to, the Company's business.
The sale of alcoholic beverages at Anchor's casinos is subject to licensing,
control, and regulation by the applicable state and local authorities. All
alcoholic beverage licenses are revocable and are not transferable. The agencies
involved have full power to limit, condition, suspend, or revoke any such
license, and any such disciplinary action could (and revocation would) have a
material adverse effect on Anchor.
The State of Colorado has enacted an annual tax on adjusted gross proceeds,
as defined under Colorado law ("AGP") (gross gaming revenue being defined
generally as the total amount wagered minus the total amount paid out in prizes)
of 2% of the first $2.0 million of AGP, 4% from $2.0 million to $4.0 million of
AGP, 14% from $4.0 million to $5.0 million of AGP, 18% from $5.0 million to
$10.0 million of AGP, and 20% of amounts in excess of $10.0 million of AGP.
During the first year of gaming, casinos operated under a three-tiered tax
system in which they paid 4% on the first $440,000 of AGP, 8% from $440,000 to
$1.2 million of AGP, and 15% above $1.2 million of AGP. During the second gaming
year, October 1, 1992 to September 30, 1993, casinos paid 2% on the first $1.0
million of AGP and 20% on any amount above $1.0 million of AGP. In the third
year, October 1, 1993 to September 30, 1994, casinos paid 2% on the first $1.0
million of AGP, 8% from $1.0 million to $2.0 million of AGP, 15% from $2.0
million to $3.0 million of AGP, and 18% above $3.0 million of AGP. During the
fourth and fifth years, October 1, 1994 through September 30, 1996, casinos paid
2% on the first $2.0 million of AGP, 8% from $2.0 million to $4.0 million of
AGP, 15% from $4.0 million to $5.0 million of AGP, and 18% above $5.0 million of
AGP. During the sixth year, October 1, 1996 through September 30, 1997, casinos
paid 2% on the first $2.0 million of AGP, 4% from $2.0 million to $4.0 million
of AGP, 14% from $4.0 million to $5.0 million of AGP, 18% from $5.0 million to
$10.0 million of AGP, and
15
<PAGE>
20% of amounts in excess of $10.0 million of AGP. During September 1997, the
Commission decided to adjust the gaming tax year for several reasons including
that it should coincide with Colorado's fiscal year, July 1 through June 30.
Consequently, during the abbreviated seventh year of gaming, October 1, 1997
through June 30, 1998, casinos paid 2% of the first $2.0 million of AGP, 4% from
$2.0 million to $4.0 million, 14% from $4.0 million to $5.0 million, 18% from
$5.0 million to $10.0 million, and 20% of amounts in excess of $10.0 million of
AGP. Pursuant to the timing adjustment from October 1 to July 1, gaming taxes
for the eighth year of gaming, July 1, 1998 through June 30, 1999, have been
established at 2% of the first $2.0 million of AGP, 4% from $2.0 million to $4.0
million of AGP, 14% from $4.0 million to $5.0 million of AGP, 18% from $5.0
million to $10.0 million of AGP, and 20% of amounts in excess of $10.0 million
of AGP. Effective July 1 of each year, the Colorado Gaming Commission
establishes the gross gaming revenue tax for the following 12 months. Under the
Colorado Constitution, the Commission is authorized to increase the gaming tax
rate to as much as 40%. There can be no assurance that the taxes or fees
applicable to the Company will not be increased in the future, either by the
Colorado electorate, legislation, or action by the Colorado Commission resulting
in an adverse effect on the Company's operations.
In addition, a "device fee" is required for each gaming device (i.e., each
gaming machine and each gaming table). The State of Colorado currently imposes
an annual fee of $75 per device (reduced from $100 effective October 1, 1994).
Cripple Creek currently imposes a two-tiered quarterly device fee of $225 per
device on the first 50 devices and $300 per device on devices of 51 or more.
Black Hawk's annual fee per device is $750.00. Black Hawk and Cripple Creek also
impose liquor licensing fees, restaurant fees, and parking impact fees. Further,
Anchor has paid, and in the future may be required to pay, local parking and
other municipal "impact fees" based on the square footage of its facilities.
Significant increases in the applicable taxes or fees, or the imposition of new
taxes or fees could have a material adverse effect on Anchor, and it is not
unreasonable to expect that such taxes or fees could be increased or new taxes
or fees imposed.
PROPRIETARY GAMES APPROVAL
Anchor is licensed in several gaming jurisdictions as a distributor and/or
manufacturer of gaming machines. These jurisdictions exert substantial
regulatory controls over the Company and may impose restrictions on ownership of
the Company's securities and require findings of suitability of individuals
associated with the Company. Each of the Company's games must be approved and
licensed in each jurisdiction in which it is played. Obtaining required
approvals and licenses can be time consuming and costly and there can be no
assurance of success. In addition, there can be no assurance that regulations
adopted or taxes imposed by other states will permit profitable operations by
the Company.
OTHER JURISDICTIONS
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver, or receive gaming
machines, gaming machine type devices, and components across state lines or to
operate gaming machines unless that person has first registered with the
Attorney General of the United States. The Federal Act does not apply to the
Company's proprietary table games but does apply to the Company's proprietary
gaming machines. Anchor has registered under the Federal Act and must renew its
registration annually. In addition, various record keeping and equipment
identification requirements are imposed by the Federal Act. Violation of the
Federal Act may result in seizure and forfeiture of the equipment, as well as
other penalties. Any expansion of Anchor's gaming activities in Nevada and
Colorado may require, and any expansion into other jurisdictions would require,
additional approvals, licenses, and permits from various gaming authorities.
In August 1996, the United States Congress passed legislation creating the
National Gambling Impact and Policy Commission to conduct a comprehensive study
of all matters relating to the economic and social impact of gaming in the
United States. The legislation provides that, not later than two years after
16
<PAGE>
the enactment of such legislation, the commission must issue a report to the
President and to Congress containing its findings and conclusions, together with
recommendations for legislation and administrative actions. Any such
recommendations, if enacted into law, could adversely impact the gaming industry
and have a material adverse effect on the Company's business or results of
operations. The Company is unable to predict whether this study will result in
legislation that would impose regulations on gaming industry operators,
including the Company, or whether such legislation, if any, would have a
material adverse effect on the Company. Additionally, from time to time, certain
federal legislators have proposed the imposition of a federal tax on gaming
revenues. Any such tax could have a material adverse effect on the Company's
financial condition or results of operations.
RISK FACTORS
This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and other applicable securities laws. All statements other
than statements of historical fact are "forward-looking statements" for purposes
of these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans, strategies and objectives of
management for future operation, any statements concerning proposed new
products, services or developments, any statements regarding future economic
conditions or performance; statements of belief; and any statement of
assumptions underlying any of the foregoing. Such forward-looking statements may
be contained in the Company's business description and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, among
other places. Although the company believes that the expectations reflected in
any of its forward-looking statements will prove to be correct, actual results
could differ materially from those projected or assumed in the Company's
forward-looking statements. The Company's future financial condition and
results, as well as any forward-looking statements, are subject to the inherent
risks and uncertainties that are summarized in this section and that are
described from time to time in the Company's reports filed with the Securities
and Exchange Commission. The Company undertakes no obligation to update any
forward-looking statement.
RISKS OF PROPRIETARY GAMES.
The Company places its proprietary games in casinos at no initial cost under
short-term arrangements, making these games susceptible to replacement due to
pressure from competitors, changes in economic conditions, obsolescence, and
declining popularity. Anchor intends to maintain and expand the number of
installed proprietary games through enhancement of existing games, introduction
of new games, and customer service, but there can be no assurance that these
efforts will be successful.
Introduction of new proprietary games involves significant risks, including
variations in the Company's ability to place games with casinos, the economic
terms on which casinos will accept the machines, the popularity of the games
with gaming patrons, and the ability of its games to be successful and popular
over the long-term. If the Company is not successful in introducing new games,
the effects on Anchor could be material and adverse.
Anchor has filed trademark and patent applications to protect its
intellectual property rights in certain of its trademarks and innovations on
certain of its proprietary games, respectively. At this time, however, the
United States Patent and Trademark Office has not acted upon all of these
applications. There can be no assurance that the pending patent or trademark
applications will actually issue as patents or trademark registrations or that
any of these rights will not be infringed by others. Certain of the Company's
game concepts, including Silver Strike, Totem Pole, and Clear Winner, among
others, do not have independent protection of the game itself, and it is
possible that competitors could produce a similar game without violating any
legal rights of the Company. Anchor intends to promote aggressively its
trademarks to build goodwill and customer loyalty. In addition, Anchor intends
to improve and add innovations to certain of its games, which may be subject to
legal protection. There can be no assurance, however, that the Company
17
<PAGE>
will be successful in these efforts, that innovations will be subject to legal
protection, or that the innovations will give a competitive advantage to the
Company.
Anchor also derives revenues from the sale of souvenir tokens that are paid
out by Silver Strike machines. The primary raw material for the tokens is
silver, the price of which is subject to wide fluctuations. As silver prices
rise, the Company may be unable to pass price increases through to its casino
customers.
COMPETITION
Proprietary Games. Intense competition characterizes the market for
proprietary games. Competitors in the game industry include manufacturers of
gaming devices and other companies marketing gaming products and conversion
kits, which compete directly with the Company for the limited gaming spaces
available at casinos. The popularity of any of the Company's games may decline
over time as consumer preferences change or as new, competing games are
introduced. The Company's competitors are engaged in intense efforts to produce
proprietary games that compete with those of the Company. As a result, Anchor
must continually adapt its products to consumer preferences in order to maximize
the economics of the game to the Company. There can be no assurance, however,
that Anchor will continue to be successful in developing and marketing its
products. If the Company fails to develop games that achieve market acceptance
or if existing games become obsolete due to the introduction of popular games by
Anchor's competitors the effects on Anchor could be material and adverse.
Anchor's strategy of creating recurring revenues from its proprietary games
by placing the games in casinos under a royalty, revenue participation, fixed
daily rental fee, or similar agreements involves a departure from the
traditional practice of casinos purchasing gaming devices. To the extent that
casinos are reluctant to, or decide not to, enter into arrangements that
generate recurring revenues for suppliers of casino games, the market for
Anchor's proprietary games could be limited, or discontinued if casino operators
decide to reject Anchor's revenue sharing model. Competition within the market
for games that generate recurring revenues could intensify as other suppliers of
gaming devices enter this market or offer competitive products or terms.
Colorado Casinos. Intense competition also characterizes the Black
Hawk/Central City and Cripple Creek markets. Since limited stakes gaming was
instituted in Colorado in 1991, a number of Colorado casinos have ceased
operations and others have filed for protection under Chapter 11 of the
Bankruptcy Code. Others have closed temporarily or reduced the number of
employees, and many casinos may not be operating profitably. Several proposals
have been made to open new casinos or to expand existing casinos in Black Hawk,
some of which have been abandoned or modified.
In June 1998, a joint venture between Black Hawk Gaming & Development
Company, Inc. and Jacobs Entertainment Ltd. commenced casino operations, "The
Lodge," which includes 800 slot machines, 20 table games, and 500 parking
spaces. Two casinos are being developed in Black Hawk located across the
intersection from the Company's Colorado Central Station Casino. Casino America
and Nevada Gold & Casinos have commenced construction of a casino scheduled to
open in early 1999, which is expected to include 1,100 slot machines, 24 table
games, and a 1,000 car parking garage. Riviera Holdings Corporation has also
commenced construction of a casino scheduled to open in late 1999, which is
expected to include 1,000 slot machines, 14 table games, and a 500 space covered
parking garage. Black Hawk Brewery has commenced construction of a casino,
located next to Colorado Central Station, scheduled to open in late 1999 which
is expected to include 600 slot machines, 10-20 table games and 500 parking
spaces. Fitzgeralds has also announced an expected expansion of approximately
50% of their current gaming area as well as a 70-80 room hotel. Potential
projects include the Hyatt, which would include approximately 800-1,000 slot
machines and the Dakota Works project, which would include approximately 1,000
slot machines. Competition from these entrants to the market could have a
material adverse effect on the Company.
18
<PAGE>
It appears that national, regional, state, and local competition for the
casino gaming market in general will remain extremely high during the
foreseeable future, as casino gaming activities expand in traditional gaming
states and in new jurisdictions. In addition, passage of the Indian Gaming
Regulatory Act in 1988 has led to rapid increases in Native American gaming
operations, and the Company's two casinos may compete for customers with casinos
located on Indian reservations in southwestern Colorado. The Company expects
many competitors to enter new jurisdictions that authorize gaming, some of which
may have greater financial and other resources than the Company. Such
proliferation of gaming activities could adversely affect the Company's
business. In particular, the legalization of casino gaming in or near any
metropolitan area, such as Denver, Colorado, from which the Company draws
customers would have a material adverse effect on the Company's business. The
Company believes, however, that proliferation of gaming activities into new
jurisdictions presents an opportunity for it to expand its proprietary games
operations.
Route Operations. Gaming machines and gaming of all types are available in
Nevada casinos and in restricted gaming locations similar to those in which the
Company operates gaming machines, and all of these gaming establishments compete
directly or indirectly with Anchor's route operations. In addition, Anchor is
subject to substantial competition for the operation of gaming machines in
approved locations from numerous small gaming machine route operators and some
large operators, located principally in Las Vegas and Reno, Nevada, and their
surrounding areas. The principal methods of competition for gaming machine
locations are the lease, sublease, license, or revenue sharing terms, the
service provided by the route operator, the reputation of the route operator,
and the financial strength of the route operator. As existing space lease and
revenue participation arrangements expire, competition for renewals can be
expected to increase the amounts payable to location owners as compared to
amounts payable under existing agreements.
RISKS OF PURSUING NEW CASINO GAMING OPPORTUNITIES
The Company is actively seeking to expand its casino operations into
jurisdictions that have legalized or are expected to legalize gaming in the
future. There can be no assurance, however, that the Company will be able to
identify suitable casino projects in which to invest or will be able to complete
any such project as scheduled or contemplated. The Company's ability to complete
and operate new casino projects will be dependent on a number of factors, many
of which are beyond Anchor's control, including identifying suitable investment
partners (if appropriate), negotiating acceptable terms, securing required
state, foreign, and local licenses, permits, and approvals, securing adequate
financing on acceptable terms, identifying and securing suitable locations
(which management expects will be limited and in high demand), voter and other
political approvals, demographic trends, and consumers' gaming preferences. As a
result, there can be no assurance that the Company will be able to develop new
or expand its current casino operations. In addition, the Company may incur
costs in connection with pursuing new gaming opportunities that it cannot
recover and may be required to expense certain of these costs, which may
negatively affect the Company's reported operating performance for the periods
during which such costs are expensed.
RISKS OF DEPENDENCE ON SUPPLIERS
The Company utilizes outside vendors, some of which are competitors of the
Company, to manufacture a significant portion of its proprietary game machines
and parts. An inability to obtain gaming machines and components, production
parts, and replacement parts on reasonable terms or on a timely basis could have
an adverse effect on Anchor. Additionally, vendors may refuse to support or
modify existing equipment to comply with licensing and regulatory requirements
of various gaming jurisdictions. An inability to comply with licensing and
regulatory requirements could result in the Company being prohibited from
expanding into new gaming jurisdictions and possibly being required to remove
installed games from existing jurisdictions, both of which could have a material
adverse effect on the Company.
19
<PAGE>
GAMING REGULATIONS AND TAXES
The Company's operations are subject to extensive state and local regulation
and taxation in Nevada, Colorado, and other jurisdictions in which Anchor
operates, and any future activities in additional jurisdictions will be
similarly regulated and taxed. State and local authorities require various
licenses, permits, and approvals to be held by the Company, and these
authorities may, among other things, revoke the license of any entity licensed
as a gaming corporation, the registration of any entity registered as a holding
company of a gaming corporation, or the license of any individual licensed as an
officer, director, control person, employee, or stockholder of a licensed or
registered entity. Regulatory changes or increases in applicable taxes or fees
in Nevada or Colorado or the laws of other jurisdictions in which the Company
operates could have a material adverse effect on the Company. There can be no
assurance that regulations adopted or taxes imposed by Nevada, Colorado, or
other jurisdictions will not have a material adverse effect on the Company. See
"Regulation."
Gaming licenses and related approvals are deemed to be privileges under the
laws of Nevada, Colorado, and the other jurisdictions in which the Company
operates. The gaming laws and regulations of the states in which the Company
operates grant substantial discretion to gaming regulatory authorities to
monitor and control the activities and operations of all lines of business in
which the Company operates. Accordingly, the gaming authorities have power to
require that the Company comply with new and discretionary directives of these
gaming authorities with respect to the operation and performance of its
proprietary games and the operations of its routes and casinos. In such highly
regulated environments, there is a constant risk that consumer pressures,
political considerations, or changes in regulatory personnel or approach could
have a material adverse effect on the Company and its operations.
Colorado law requires statewide voter approval of an amendment to the State
Constitution for any expansion of limited gaming into additional locations and,
depending on the authorization approved by the statewide vote, requires, in
addition, voter approval from the locality in question. In 1994, Colorado voters
defeated by a margin of 93% to 7% a proposal to permit gaming in Manitou Springs
(located near Colorado Springs and Cripple Creek) and slot machines in airports.
On November 5, 1996, Colorado voters defeated by a margin of 69% to 31% a
proposal to allow gaming in the community of Trinidad, located on the New Mexico
border. Recently, the state legislature passed, but the Governor vetoed, a bill
that would have permitted video lottery terminals at dog and horse racetracks
under certain terms and conditions. Several cities within Colorado have active
citizens' lobbies that were able to place gaming initiatives on recent statewide
ballots. Although these initiatives have failed, new initiatives could be
introduced on future statewide ballots to allow expansion of gaming in Colorado
or prohibit gaming in the particular markets in Colorado where the Company
operates. Future initiatives, if passed, could significantly increase the
competition for gaming customers, thereby adversely affecting the Company's
operations in Colorado. Additionally, there can be no assurance that future
legislation will not be enacted that would impose additional restrictions or
prohibitions on, or assess additional fees with respect to, the Company's
business.
Each of the Company's proprietary games must be approved and licensed in
each jurisdiction in which it is placed. The Company must still obtain approvals
for certain of its games in certain gaming jurisdictions before it can fill all
of its orders to place machines. Obtaining required licenses can be time
consuming and costly and there can be no assurance that any game will be
successfully licensed in any jurisdiction.
Any beneficial holder of the Common Stock may be subject to investigation by
gaming authorities in Nevada, Colorado, and other jurisdictions in which Anchor
does business if such authorities have reason to believe that such ownership may
be inconsistent with a state's gaming policies. Persons who acquire beneficial
ownership of more than certain designated percentages of the Common Stock may be
subject to certain reporting and qualification procedures. The Company's
Articles of Incorporation provide that all transfers of voting securities are
subject to the regulations of each regulatory body to which the Company's
20
<PAGE>
activities are subject and provide for a mandatory repurchase of Common Stock if
a stockholder is found unsuitable. In addition, changes in control of the
Company and certain other corporate transactions may not be effected without the
prior approval of gaming authorities in Nevada, Colorado, and other
jurisdictions in which the Company does business. Such provisions could
adversely affect the marketability of the Common Stock or prevent certain
corporate transactions, including mergers or other business combinations. See
"Regulation."
In August 1996, the United States Congress passed legislation creating the
National Gambling Impact and Policy Commission to conduct a comprehensive study
of all matters relating to the economic and social impact of gaming in the
United States. The legislation provides that, not later than two years after the
enactment of such legislation, the commission must issue a report to the
President and to Congress containing its findings and conclusions, together with
recommendations for legislation and administrative actions. Any such
recommendations, if enacted into law, could adversely impact the gaming industry
and have a material adverse effect on the Company's business or results of
operations. The Company is unable to predict whether this study will result in
legislation that would impose additional regulations on gaming industry
operators, including the Company, or whether such legislation, if any, would
have a material adverse effect on the Company. Additionally, from time to time,
certain federal legislators have proposed the imposition of a federal tax on
gaming revenues. Any such tax could have a material adverse effect on the
Company's financial condition or results of operations.
ACCESS TO BLACK HAWK AND CRIPPLE CREEK
The cities of Black Hawk and Cripple Creek are located in the Colorado
Rockies and each is serviced by winding mountain roads that require extremely
cautious driving, especially in bad weather. These roads also have tunnels that
are subject to closure. Congestion on the roads leading into Black Hawk and
Cripple Creek is not uncommon during the peak summer season, holidays, and other
times of the year, and such congestion may discourage potential customers from
traveling to the Company's casinos. In addition, concerns about the overall
availability of convenient parking in Black Hawk and, to a lesser extent,
Cripple Creek may discourage some potential customers. Further, Black Hawk and,
to a lesser extent, Cripple Creek have experienced unanticipated demands for
their municipal systems, including water and sewage treatment facilities.
Increased levels of activity in the area may exacerbate old or pose new
municipal and environmental problems, the costs of which could be imposed on the
gaming industry and in part by the Company.
ENVIRONMENTAL CONSIDERATIONS
The Colorado Central Station Casino is located in an area that has been
designated by the Environmental Protection Agency (the "EPA") as a superfund
site on the National Priorities List, known as the Central City-Clear Creek
Superfund Site (the "Site"), as a result of contamination from historic mining
activity in the area. The EPA is entitled to proceed against owners and
operators of properties located within the Site for remediation and response
costs associated with their properties and with the entire Site. The Colorado
Central Station Casino is located within the drainage basin of North Clear Creek
and is therefore subject to potentially contaminated surface and ground water
from upstream mining-related sources. Soil and ground water samples on the Site
indicate that several contaminants exist in concentrations exceeding drinking
water standards. Records relating to historical uses of the Site are uncertain
as to whether mining actually occurred below the Company's property. Records do
indicate, however, that an ore loading dock for a railroad depot was once
located on adjacent property, and railroad tracks were present on the Company's
property. Management is not aware of any environmental issues associated with
these activities.
21
<PAGE>
RISKS OF NEVADA ROUTE OPERATIONS
In 1998, the Mayor of Las Vegas formed a committee to study the effect of
gaming in grocery and convenience stores in Las Vegas. In connection with the
study, certain proposals to prohibit, limit, or change gaming devices in
convenience, grocery and similar retail facilities may be made. Other government
officials, as well as other individuals, may from time to time suggest proposals
to prohibit, limit, or change gaming devices in convenience, grocery and similar
retail facilities throughout Nevada, The broad adoption of any such proposal
could have a material adverse effect on the Company's Nevada route operations.
DEPENDENCE ON PERSONNEL
The success of Anchor is largely dependent on the efforts and skills of
Stanley E. Fulton, its Chairman of the Board, and other key officers and
employees of Anchor. The loss of Mr. Fulton's or such other key officers' or
employees' services could have a material adverse effect on Anchor. The
expansion of Anchor's businesses may require additional managers with gaming
industry experience, as well as additional skilled employees. A shortage of
skilled management personnel exists in the gaming industry, which may make it
more difficult and expensive to attract and retain qualified managers and
employees. In addition, some of the Company's key employees perform their
services under contracts that do not contain covenants not to compete with the
Company, and it is therefore possible that competitors could attempt to hire
certain of the Company's key employees. Competition for employees in the Black
Hawk market could intensify as additional operators open or plan to open new
facilities. This competition could cause increases in the cost of retaining
employees or could cause employees to become scarce, both of which could have a
material adverse effect on the Company.
CONTROL OF THE COMPANY
In October 1997, Anchor Gaming completed an offering (the "Offering") of
1,800,000 shares of common stock, of Anchor (the "Common Stock") offered by
certain selling stockholders, including Stanley E. Fulton, Chairman and Chief
Executive Officer of the Company (657,700 shares), and Elizabeth Fulton and the
six Fulton children (1,142,300 shares). Upon completion of the Offering, the
officers and directors of the Company and members of their respective families
own beneficially approximately 40.5% of the outstanding Common Stock. The
ability to vote these shares gives such persons the ability to exert substantial
influence over any matter coming to a vote of stockholders of the Company,
including the election of directors and certain mergers, asset sales, or other
major corporate transactions affecting the Company. All six of Mr. Fulton's
children and a third party have granted him an irrevocable proxy expiring on
December 31, 1998 to vote their shares of Common Stock. As a result, Mr. Fulton
will have voting control of more than 40% of the Common Stock outstanding. Such
voting power, together with certain anti-takeover provisions included in the
Company's Articles of Incorporation and Bylaws and a Shareholder Rights Plan
could have the effect of delaying or discouraging an unsolicited takeover of the
Company.
INVENTORY SUBJECT TO GAMING APPROVAL
At any point, the Company may be in the process of developing proprietary
games that have not yet received regulatory approvals. Anticipating demand for
its games after receipt of regulatory approval, the Company may begin to
manufacture games pending regulatory approval, and may develop a substantial
inventory of games that are not approved for use under the gaming laws and
regulations to which the Company is subject. To the extent that the Company does
not receive approval of games in its inventory, or if games in its inventory
require modification before they can be placed in service, the Company could be
materially and adversely affected.
22
<PAGE>
CONTINUING DIRECTOR PROVISION IN THE COMPANY'S RIGHTS PLAN
The Delaware Chancery Court has recently ruled that a rights agreement
provision similar to the Continuing Director requirement included the Company's
Rights Plan is unenforceable under Delaware law. The Company is not a Delaware
corporation and Delaware law does not govern the Company's Rights Plan. Nevada
courts have not ruled on the enforceability of a similar provision under Nevada
law; there can be no assurance that a Nevada court would enforce the Company's
Continuing Director provisions.
ITEM 2. PROPERTIES.
The Company's principal properties consist of (i) the Colorado Central
Station Casino in Black Hawk, Colorado, (ii) the Colorado Grande Casino in
Cripple Creek, Colorado, and (iii) the corporate headquarters in Las Vegas,
Nevada.
The Colorado Central Station Casino is situated on approximately 1.8 acres
of land on the south end of Black Hawk, near Main Street and Colorado State
Highway 119. Black Hawk, Colorado is approximately 40 miles from Denver,
Colorado. The Colorado Central Station has more than 700 gaming machines, 19
table games, and food-court restaurant area. The Colorado Central Station Casino
building has approximately 49,000 square feet of floor space, with 16,637 square
feet of gaming area over three floors. The casino has more than 600 parking
spaces and is the first shuttle stop from Black Hawk's 3,000-space public
facility.
The Colorado Grande Casino is located 45 miles from Colorado Springs and 75
miles from Pueblo, Colorado. The facility, which is leased, occupies 15,000
square feet of a commercial facility, of which 3,125 square feet are devoted to
gaming. The casino is located at one of the principal intersections in Cripple
Creek and has 44 adjacent parking spaces and a separate lot for employee
parking. The casino features more than 210 gaming machines, a full service
restaurant, and bar.
In October 1994, the Company consolidated its Las Vegas offices into a new
headquarters facility, also located in Las Vegas. Since that time it has
expanded to 17,000 square feet of office space and 30,000 square feet of
sub-assembly and warehouse space, all of which is leased.
ITEM 3. LEGAL PROCEEDINGS.
Several securities class action lawsuits have been filed against the Company
and certain of its current and former officers and directors. The lawsuits were
filed in various jurisdictions following the Company's announcement in early
December 1997 that the Company's results for the December quarter might not meet
analysts' expectations. The lawsuits have been brought on behalf of certain
purchasers of the stock of the Company and allege violations of state and/or
federal securities laws arising out of alleged misstatements and omissions to
state material facts about the Company over various periods of time covered by
the lawsuits. The lawsuits have all been consolidated in Nevada, both in federal
and state court. The consolidated federal action is captioned In re Anchor
Gaming Securities Litigation, Civil Action No.
CV-S-97-01751-PMP (RJJ), and the consolidated state action is captioned Ryan, et
al. v. Anchor Gaming, et al., Civil No. A383456. Certain other actions have been
transferred and/or dismissed. The Company believes that the claims are without
merit, and the Company intends to vigorously contest the lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the Nasdaq National
Market-Registered Trademark- and trades under the symbol "SLOT." The following
table sets forth the high and low closing prices per share of the Company's
Common Stock on the Nasdaq National Market for the described periods. The
Company has not declared any dividends from the time of the IPO until the
present.
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1998
First quarter................................................................................ $90 1/2 $47 1/4
Second quarter............................................................................... $95 1/8 $43
Third quarter................................................................................ $74 1/4 $55 3/16
Fourth quarter............................................................................... $93 11/16 $76
</TABLE>
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1997
First quarter................................................................................ $68 3/4 $50 1/2
Second quarter............................................................................... $64 1/2 $30 1/8
Third quarter................................................................................ $40 3/4 $27 7/8
Fourth quarter............................................................................... $47 3/4 $25
</TABLE>
As of September 11, 1998, there were approximately 10,000 beneficial holders
of the Company's common stock.
The board of directors intends to retain any earnings of the Company to
support operations and to finance expansion and does not intend to pay cash
dividends on the Common Stock of Anchor in the foreseeable future. The Company
is a party to a revolving credit facility with a bank that prohibits the payment
of dividends. Subject to contractual restrictions, any future determinations as
to the payment of dividends will be at the discretion of the board of directors
of the Company, and will depend on the Company's financial condition, results of
operations, capital requirements, and such other factors as the board of
directors deems relevant.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial and operating information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included elsewhere or incorporated by reference in this Annual Report on
Form 10-K. The income statement and balance sheet data for each of the five
fiscal years ended June 30, 1998 are derived from the audited consolidated
financial statements of the Company.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994(1)
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Proprietary games.................................. $ 113,677 $ 49,716 $ 21,457 $ 14,159 $ 4,147
Casino operations.................................. 82,139 69,223 65,125 56,184 23,713
Route operations................................... 34,314 33,510 28,651 25,818 26,123
Other.............................................. 1,802 1,300 1,233 1,250 786
---------- ---------- ---------- --------- ---------
Total revenues................................... 231,932 153,749 116,466 97,411 54,769
---------- ---------- ---------- --------- ---------
Costs and expenses:
Proprietary games.................................. 13,475 11,039 12,113 9,851 3,047
Casino operations.................................. 35,065 29,100 26,830 21,500 8,199
Route operations................................... 21,442 19,905 17,158 15,659 15,416
Other.............................................. 1,840 1,432 1,300 1,387 768
Selling, general, and administrative............... 41,218 28,164 21,074 20,949 10,375
Preopening costs................................... -- -- -- -- 731
Project cost write-downs........................... -- 2,117 -- -- --
Depreciation and amortization...................... 12,661 8,798 4,110 3,215 2,121
---------- ---------- ---------- --------- ---------
Total costs and expenses......................... 125,701 100,555 82,585 72,561 40,657
---------- ---------- ---------- --------- ---------
Income from operations............................... 106,231 53,194 33,881 24,850 14,112
Interest income...................................... 2,989 3,793 2,028 1,105 379
Interest expense..................................... (226) (288) (429) (732) (1,314)
Other income (expense)(2)............................ 446 (22) 43 244 244
---------- ---------- ---------- --------- ---------
Income before provision for income taxes............. 109,440 56,677 35,523 25,467 13,421
Historical and pro forma provision for income
taxes(3)........................................... 41,040 21,001 13,188 9,486 4,702
---------- ---------- ---------- --------- ---------
Net income and pro forma net income(3)............... $ 68,400 $ 35,676 $ 22,335 $ 15,981 $ 8,719
---------- ---------- ---------- --------- ---------
Weighted average shares outstanding(4)............... 12,751 13,321 11,820 11,252 8,481
Basic earnings per share(3).......................... $ 5.36 $ 2.68 $ 1.89 $ 1.42 $ 1.03
Weighted average common and common equivalent shares
outstanding(4)..................................... 13,161 13,542 12,038 11,447 8,481
Diluted earnings and pro forma diluted earnings per
share(3)........................................... $ 5.20 $ 2.63 $ 1.86 $ 1.40 $ 1.03
OTHER DATA:
Capital expenditures................................. $ 22,499 $ 38,108 $ 27,916 $ 7,834 $ 17,921
Distributions to stockholders(5)..................... -- -- -- 6,760
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------------------
1998 1997 1996 1995 1994(1)
---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 73,187 $ 66,427 $ 78,113 $ 26,132 $ 10,472
Total assets......................................... 245,134 188,876 162,312 79,266 58,903
Long term notes payable.............................. -- 2,800 3,650 5,989 6,927
Stockholders' equity(5).............................. 210,482 171,331 146,307 64,832 47,001
</TABLE>
- ------------------------
(1) Reflects six months of operations at the Company's Colorado Central Station
Casino in Black Hawk, Colorado, which opened December 25, 1993, and five
months of proprietary games operations acquired in conjunction with the
Company's initial public offering in February 1994 (the "IPO").
(2) Other income (expense) consists of minority interest in earnings of
consolidated subsidiary, and other income (expense).
(3) A pro forma provision for federal income taxes (assuming a 34% effective tax
rate through fiscal 1994) has been calculated for all periods prior to the
IPO as if the principal subsidiaries of the Company had not elected to be
treated as S corporations during those periods.
(4) Weighted average shares outstanding and weighted average common and common
equivalent shares outstanding are presented as if the reorganization
completed in conjunction with the Company's IPO took place July 1, 1993.
(5) Because the principal subsidiaries of the Company elected to be treated as S
corporations prior to the Company's IPO, a substantial portion of the
Company's net income prior to the IPO was distributed to its stockholders.
Subsequent to the Company's IPO, earnings have been retained to support
operations and to finance expansion.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
In February 1994, Anchor completed its IPO of 3,162,500 shares of Common
Stock at a price of $12 per share. Simultaneously with the closing of the IPO,
Anchor became the holding company for its current subsidiaries, Anchor Coin,
Colorado Grande Enterprises, Inc., C.G. Investments, Inc., and D D Stud, Inc.,
each of which had been operated under different ownership structures controlled
primarily by Stanley E. Fulton, the Chairman of the Board, Chief Executive
Officer, and acting Chief Financial Officer of Anchor. Also at the time of the
IPO, the Company acquired all of the beneficial ownership of Global Gaming
Products, L.L.C. and certain related assets from Global Distributors, Inc. (the
"Acquisition"), which were primarily involved in the distribution of the
proprietary game Silver Strike. Stanley E. Fulton also owned 50% of Global
Gaming Products, L.L.C. prior to the Acquisition. The financial position and
operating results of Colorado Grande Enterprises, Inc. are included in the
consolidated financial statements as an 80% consolidated subsidiary.
On April 23, 1996, the Company completed a secondary offering of 2.3 million
shares of Common Stock at a price of $37 per share. 1.55 million of these shares
were sold by the Company (the "Secondary Offering") and the remaining 750,000
shares were sold by selling stockholders. Net proceeds to the Company from the
Secondary Offering were $53.9 million. On October 17, 1997, the Company
completed an offering of 1.8 million shares of Common Stock at a price of $91
per share. All of these shares were sold by selling stockholders. The Company
did not receive any proceeds from the offering.
The following table sets forth the percentage of Anchor's total revenues
attributable to proprietary games operations, casino operations, route
operations, and other during the fiscal years ended June 30, 1998, 1997, and
1996. The growth in proprietary games revenue as a percentage of total revenues
is attributable primarily to the commencement of the Strategic Alliance with IGT
during the second half of fiscal 1997, and to a lesser extent, the Company's
introduction of the new proprietary game Wheel of Gold, which began generating
revenue in the third quarter of fiscal 1996.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
SOURCES OF REVENUES:
Proprietary games operations........................................................... 49.0% 32.4% 18.4%
Casino operations...................................................................... 35.4 45.0 55.9
Route operations....................................................................... 14.8 21.8 24.6
Other.................................................................................. .8 .8 1.1
--------- --------- ---------
Total revenues....................................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Total revenues were $231.9 million for the fiscal year ended June
30, 1998, an increase of $78.2 million or 50.9% from $153.7 million for the
fiscal year ended June 30, 1997.
Revenues from proprietary games operations were $113.7 million for the
fiscal year ended June 30, 1998, an increase of $64.0 million or 128.7% from
$49.7 million for the fiscal year ended June 30, 1997. The increase is primarily
due to increased equity earnings in the Company's joint venture alliance with
IGT, which, for accounting purposes, is recorded net of expense. At June 30,
1998 there were more than 5,600 games, primarily Wheel of Fortune, operating
within the joint venture, compared to more than 2,000 games at June 30, 1997.
This increase is also due to increased revenues from the Company's proprietary
games Wheel of Gold and Totem Pole, and to a lesser extent increased revenues
from the proprietary games Rock'N'Reels and SafeBuster. These increases were
offset to some extent by decreased revenues
27
<PAGE>
generated from the sale of tokens for the proprietary game Silver Strike and
decreased revenues generated from the proprietary game Clear Winner. The Company
expects the trend of reduced year-to-year Silver Strike and Clear Winner revenue
comparisons to continue due to the market maturity of these proprietary games.
After completing a full year of operations within the joint venture alliance
with IGT, we now recognize that these operations are influenced by seasonal
fluctuations as a result of weather and casino patron traffic patterns. We
expect that these seasonal trends will continue in both our joint venture
operations and our proprietary games operations outside of the joint venture.
Revenues from casino operations were $82.1 million for the fiscal year ended
June 30, 1998, an increase of $12.9 million or 18.7% from $69.2 million for the
fiscal year ended June 30, 1997. This increase is primarily due to increased
slot revenues at the Colorado Central Station Casino and, to a lesser extent,
increased slot revenues at the Colorado Grande Casino. The Company's Colorado
casino operations were the beneficiary of mild weather during the six months
ended June 30, 1998. The competitive landscape has begun to change recently in
the Black Hawk market. On June 24, 1998 a competitor opened a new casino, as
expected, near the Colorado Central Station Casino. The Company expects the
opening of another new casino by a competitor, also near the Colorado Central
Station Casino, during December 1998. The Company is aware of other casino
projects in various stages of planning in the Black Hawk market. The Company
cannot predict the effect, if any, that the new or proposed casino openings will
have on the Company's Colorado casino operations. Historically, revenues and
casino patronage in the Colorado casino operations are highest in the summer
months and those months unaffected by inclement weather. We expect this trend to
continue.
Revenues from route operations were $34.3 million for the fiscal year ended
June 30, 1998, an increase of $804,000 or 2.4% from $33.5 million for the fiscal
year ended June 30, 1997. Machines on route increased 41 machines or 5.1% to 842
machines at June 30, 1998 from 801 machines at June 30, 1997. Average machines
on route during fiscal 1998 increased 57 average machines or 7.4% to 827 average
machines from 770 average machines during fiscal 1997. The increase in route
revenue was due to the increased number of machines on route offset somewhat by
increased competition due to expansion of grocery store chains and local casino
operations. As a result of the increased competition, the trend of generally
flat year over year route revenue comparisons is expected to continue. The Mayor
of Las Vegas recently formed a committee to study the local effect of gaming in
grocery and convenience stores. The Company cannot predict the effect, if any,
that the study's results will have on its route operation's revenues and
profits.
COSTS AND EXPENSES. Total costs and expenses were $125.7 million for the
fiscal year ended June 30, 1998, an increase of $25.1 million or 25.0% from
$100.6 million for the fiscal year ended June 30, 1997. Total costs and expenses
as a percentage of total revenues decreased to 54.2% during fiscal 1998 from
65.4% during fiscal 1997.
Costs and expenses of proprietary games operations were $13.5 million for
the fiscal year ended June 30, 1998, an increase of $2.4 million or 22.1% from
$11.0 million for the fiscal year ended June 30, 1997. Proprietary games costs
and expenses as a percentage of proprietary games revenues decreased to 11.9%
during fiscal year 1998 from 22.2% during fiscal year 1997. The increase in
proprietary games costs and expenses was due to increased machine parts,
production and service payroll, shipping and handling, and production supplies,
resulting primarily from increased machine conversions and maintenance. These
increases were offset to some extent by decreased costs and expenses relating to
the sale of tokens for the proprietary game Silver Strike. The decrease in
proprietary games costs as a percentage of revenue is primarily due to equity in
the income of the joint venture with IGT, which, for accounting purposes, is
recorded net of expenses. Additionally, revenues from the Company's proprietary
games, such as Wheel of Gold and Totem Pole, incur less costs and expenses as a
percentage of revenue than the Company's Silver Strike game, which previously
accounted for a larger percentage of the Company's proprietary games revenue.
Developments in world silver markets during the past year have resulted in
increased volatility in silver prices, which, if it persists, could affect the
profitability of the Silver Strike game.
28
<PAGE>
Costs and expenses of casino operations were $35.1 million for the fiscal
year ended June 30, 1998, an increase of $6.0 million or 20.5% from $29.1
million for the fiscal year ended June 30, 1997. Casino costs and expenses as a
percentage of casino revenue increased slightly to 42.7% during fiscal year 1998
from 42.0% during fiscal year 1997. The increase in casino costs and expenses
was primarily due to increased gaming taxes and promotions, and to a lesser
extent direct payroll, at both of the Company's Colorado casinos. Although the
Company can not predict the effect of the new and proposed casino openings in
Black Hawk on the Colorado Central Station Casino's operations, management
believes it is likely to increase both promotion and payroll cost in future
periods.
Costs and expenses of route operations were $21.4 million for the fiscal
year ended June 30, 1998, an increase of $1.5 million or 7.7% from $19.9 million
for the fiscal year ended June 30, 1997. Costs and expenses of route operations
as a percentage of route revenue increased to 62.5% during fiscal year 1998
compared to 59.4% during fiscal year 1997. The increase in route costs and
expenses was primarily due to increased location costs and, to a lesser extent,
increased direct payroll costs, both related to increased machines on route.
SG&A expenses were $41.2 million for the fiscal year ended June 30, 1998, an
increase of $13.1 million or 46.4% from $28.2 million for the fiscal year ended
June 30, 1997. SG&A expenses as a percentage of total revenue decreased to 17.8%
during fiscal year 1998 compared to 18.3% during fiscal year 1997. The increase
in SG&A expenses is primarily due to increased expenses in the Company's
proprietary games operations of approximately $9.4 million, including increased
payroll and compensation costs, valuation allowances, and tax and licensing
costs, as well as increased legal costs and development costs incurred at the
holding Company level. The Company incurred approximately $1.0 million of
development costs related to the Canadian charity based casino initiative that
was cancelled by the Ontario provincial government on June 26, 1998.
Depreciation and amortization expense was $12.7 million for the fiscal year
ended June 30, 1998, an increase of $3.9 million or 43.9% from $8.8 million for
the fiscal year ended June 30, 1997. This increase is primarily due to increased
depreciation and amortization expense incurred in the Company's proprietary
games operations and, to a lesser extent, increased depreciation and
amortization expense incurred at the Company's Colorado Central Station Casino.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations was $106.2 million for the fiscal year ended June 30, 1998, an
increase of $53.0 million or 99.7% from $53.2 million for the fiscal year ended
June 30, 1997. As a percentage of total revenues, income from operations
increased to 45.8% during fiscal year 1998 from 34.6% during fiscal year 1997.
INTEREST INCOME. Interest income was $3.0 million for the fiscal year ended
June 30, 1998, a decrease of $804,000 or 21.2% from $3.8 million for the fiscal
year ended June 30, 1997. The decrease is due to decreased short-term
investments resulting from decreased cash balances during the year.
INTEREST EXPENSE. Interest expense was $226,000 for the fiscal year ended
June 30, 1998, a decrease of $62,000 or 21.5% from $288,000 for the fiscal year
ended June 30, 1997. The decrease is due to reduced average notes payable during
fiscal year 1998 as compared to fiscal year 1997. At June 30, 1998, the Company
had no long or short-term notes payable.
NET INCOME. As a result of the factors discussed above, net income was
$68.4 million for the fiscal year ended June 30, 1998, an increase of $32.7
million or 91.7% from $35.7 million for the fiscal year ended June 30, 1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Total revenues were $153.7 million for the fiscal year ended June
30, 1997, an increase of $37.2 million or 31.9% from $116.5 million for the
fiscal year ended June 30, 1996.
29
<PAGE>
Revenues from proprietary games operations were $49.7 million for the fiscal
year ended June 30, 1997, an increase of $28.2 million or 131.2% from $21.5
million for the fiscal year ended June 30, 1996. The increase is primarily due
to revenues generated from the Company's proprietary game, Wheel of Gold,
introduced December 29, 1995, as well as revenues from the Company's strategic
alliance with IGT and, to a lesser extent, from its newest proprietary game,
Totem Pole, and increased revenues generated from the proprietary game Clear
Winner. These increases were offset to some extent by decreased revenues
generated from the proprietary game Silver Strike.
Revenues from casino operations were $69.2 million for the fiscal year ended
June 30, 1997, an increase of $4.1 million or 6.3% from $65.1 million for the
fiscal year ended June 30, 1996. The increase is primarily due to increased
revenues at the Colorado Central Station Casino and, to a lesser extent, due to
increased revenues at the Colorado Grande Casino.
Revenues from route operations were $33.5 million for the fiscal year ended
June 30, 1997, an increase of $4.8 million or 16.7% from $28.7 million for the
fiscal year ended June 30, 1996. Machines on route increased to 801 at June 30,
1997, from 692 at June 30, 1996, while average machines on route during fiscal
1997 were 106 machines greater than fiscal 1996.
COSTS AND EXPENSES. Total costs and expenses were $100.6 million for the
fiscal year ended June 30, 1997, an increase of $18.0 million or 21.8% from
$82.6 million for the fiscal year ended June 30, 1996. Total costs and expenses
as a percentage of total revenues decreased to 65.4% during fiscal 1997 from
70.9% during fiscal 1996.
Costs and expenses of proprietary games operations were $11.0 million for
the fiscal year ended June 30, 1997, a decrease of $1.1 million or 9.1% from
$12.1 million for the fiscal year ended June 30, 1996. Costs and expenses of
proprietary games operations decreased primarily due to a decrease in Silver
Strike token sales in fiscal year 1997 compared to fiscal year 1996. Prior to
the introduction of Wheel of Gold, most of the proprietary games operations'
costs were associated with the production of Silver Strike tokens. Proprietary
games costs and expenses as a percentage of proprietary games revenues decreased
to 22.1% during fiscal year 1997 from 56.3% during fiscal year 1996. The
decrease in proprietary games costs and expenses as a percentage of revenue is a
result of increased revenues from the Company's newer proprietary games, which
incur less costs and expenses as a percentage of revenue than the Company's
Silver Strike game, which previously accounted for most of the Company's
proprietary games revenue.
Costs and expenses of casino operations were $29.1 million for the fiscal
year ended June 30, 1997, an increase of $2.3 million or 8.6% from $26.8 million
for the fiscal year ended June 30, 1996. Casino costs and expenses as a
percentage of casino revenue increased to 42.0% during fiscal year 1997 from
41.2% during fiscal year 1996. The increase in casino costs and expenses was
primarily due to increased gaming taxes and promotions at both of the Company's
casinos.
Costs and expenses of route operations were $19.9 million for the fiscal
year ended June 30, 1997, an increase of $2.7 million or 15.7% from $17.2
million for the fiscal year ended June 30, 1996. Costs and expenses of route
operations as a percentage of route revenue remained fairly constant at 59.4%
during fiscal year 1997 compared to 59.9% during fiscal year 1996. The increase
in route costs and expenses was primarily due to increased location costs and,
to a lesser extent, increased direct payroll costs, both related to increased
machines on route.
SG&A expenses were $28.2 million for the fiscal year ended June 30, 1997, an
increase of $7.1 million or 33.6% from $21.1 million for the fiscal year ended
June 30, 1996. SG&A expenses as a percentage of total revenue remained fairly
constant at 18.4% during fiscal year 1997 compared to 18.1% during fiscal year
1996. The increase in total SG&A expenses is primarily due to increased expenses
in the Company's proprietary games operations of approximately $4.7 million
primarily due to increased research, development, and licensing costs and an
increase in SG&A expenses at the Colorado Central Station Casino of
approximately $2.0 million.
30
<PAGE>
In November 1996, the Company announced it was re-evaluating the scope and
nature of its proposed addition of a new casino across the street from the
Colorado Central Station Casino. During the fourth quarter of fiscal year 1997,
the Company determined it was necessary to recognize a project cost write-down
of $2.1 million. The project costs were specifically related to architectural
fees, building design costs, and deferred rent that were determined to have no
future benefit.
Depreciation and amortization expense was $8.8 million for the fiscal year
ended June 30, 1997, an increase of $4.7 million or 114.6% from $4.1 million for
the fiscal year ended June 30, 1996. This increase is primarily due to increased
depreciation and amortization expense incurred in the Company's proprietary
games operations.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations was $53.2 million for the fiscal year ended June 30, 1997, an
increase of $19.3 million or 56.9% from $33.9 million for the fiscal year ended
June 30, 1996. As a percentage of total revenues, income from operations
increased to 34.6% during fiscal year 1997 from 29.1% during fiscal year 1996.
INTEREST INCOME. Interest income was $3.8 million for the fiscal year ended
June 30, 1997, an increase of $1.8 million or 90.0% from $2.0 million for the
fiscal year ended June 30, 1996. The increase is due to increased short-term
investments resulting from an increase in working capital generated from
operations as well as cash invested from the Secondary Offering.
INTEREST EXPENSE. Interest expense was $288,000 for the fiscal year ended
June 30, 1997, a decrease of $141,000 or 32.9% from $429,000 for the fiscal year
ended June 30, 1996. The decrease is due to reduced average notes payable during
fiscal year 1997 as compared to fiscal year 1996.
NET INCOME. As a result of the factors discussed above, net income was
$35.7 million for the fiscal year ended June 30, 1997, an increase of $13.4
million or 60.1% from $22.3 million for the fiscal year ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Anchor's principal sources of liquidity have been cash flows from operations
and the net proceeds from the Secondary Offering in April 1996 and the IPO in
February 1994. Net proceeds to the Company from the Secondary Offering were
$53.9 million, and net proceeds from the IPO were $34.1 million. In October
1997, certain shareholders of the Company completed a secondary public offering.
The Company did not receive any proceeds from the October 1997 offering. Net
cash provided by operating activities was $68.2 million during fiscal year 1998
and $43.4 million during fiscal year 1997. At June 30, 1998, the Company had
cash and cash equivalents of $73.2 million, working capital of $54.4 million,
and a $10.0 million unsecured revolving bank line of credit (the "Bank
Revolver").
In fiscal year 1998, the Company spent $22.5 million on capital
expenditures, primarily related to the purchase of gaming devices and equipment
for use in its proprietary games operations. The Company anticipates that
capital expenditures for the fiscal year ending June 30, 1999 will be at least
$19.0 million, which will consist primarily of expenditures to purchase gaming
devices and equipment for use in its proprietary games operations.
In April 1997, the board of directors authorized a repurchase of up to
1,000,000 shares of Common Stock. In December 1997, the board of directors
authorized a repurchase of up to 513,975 additional shares of Common Stock. As
of June 30, 1998, the Company had repurchased 974,375 shares of Common Stock at
a cost of $49.6 million, 638,375 shares were repurchased during fiscal 1998 at a
cost of $36.1 million and 336,000 shares were repurchased during fiscal 1997 at
a cost of $13.5 million. At June 30, 1998 there was a balance of 539,600
authorized shares remaining under the repurchase program.
In April 1997, the Company entered into the Bank Revolver, which expires
November 30, 1998. The Bank Revolver bears interest at the prime rate of
interest or LIBOR plus 2%, at the Company's option.
31
<PAGE>
The Company has agreed to maintain certain financial and non-financial covenants
customary with lending arrangements of this type. The Company has complied with
the covenants throughout the term of the expired credit facility and the Bank
Revolver. During fiscal year 1998 the Company did not borrow under the Bank
Revolver or the line of credit.
The Company believes its principal liquidity requirements will be the
purchase of additional proprietary gaming machines in formats that have already
been introduced to the market and the development and purchase of proprietary
gaming machines in formats that have not yet been introduced. The Company
believes that cash on hand, cash flow from operations, and available borrowings
under the Bank Revolver will be sufficient to fund its currently planned capital
projects and operations.
The Company continually seeks opportunities to expand its gaming oriented
businesses in new and existing gaming jurisdictions. If successful in pursuing
another opportunity in any gaming oriented business, and depending on the amount
of funding required, the Company may be required to obtain additional financing.
RECENTLY ADOPTED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee issued Statement of Position No. 98-5, Reporting on the
Costs of Start-Up Activities. This standard provides guidance on the financial
reporting for start-up costs and organization costs. This standard requires
costs of start-up activities and organization costs to be expensed as incurred
and is effective for fiscal years beginning after December 15, 1998, although
earlier application is encouraged. Management believes that this standard could
have a material effect on the Company's consolidated financial statements
depending on the status of the Company's current and future expansion projects
at the time this standard is adopted.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement requires companies to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for financial statements issued for
fiscal years beginning after December 15, 1997. Management does not believe this
new standard will have a material impact on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131 "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
The Company believes the segment information required to be disclosed under SFAS
131 will be more comprehensive than previously provided, including expanded
disclosure of income statement and balance sheet items for each of its
reportable segments under SFAS 131.
YEAR 2000
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. This is generally referred to as the "Year 2000 Problem." If this
situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
The Company has conducted a comprehensive review of its computer and other
systems deemed to be date sensitive (as well as those of its unconsolidated
affiliates) to assess its exposure to the Year 2000 Problem. The Company is
already in the process of modifying or replacing those systems that are not Year
2000 compliant. Based upon the comprehensive review, management believes that
the Company's systems
32
<PAGE>
are compliant or will be compliant by mid-1999. However, if modifications are
not made or not completed within an adequate time frame, the Year 2000 Problem
could have a material adverse effect on the operations of the Company.
In addition, the Company has communicated with its major vendors and
suppliers to determine their state of readiness relative to the Year 2000
Problem and the Company's exposure to third party Year 2000 issues. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that representations made to
the Company by third parties are in fact accurate. As a result, the failure of a
major vendor or supplier to adequately address their Year 2000 Problem could
have a material adverse effect on the operations of the Company.
All costs related to the Company's Year 2000 Problem are being expensed as
incurred, while the cost of new hardware or software, is being capitalized and
amortized over its expected useful life. The costs associated with Year 2000
compliance have not been and are not anticipated to be material to the Company's
financial position or results of operations. Specifically, as of June 30, 1998,
the Company has spent less than $100,000 and anticipates spending less than
$500,000 thereafter. These costs and estimated completion dates are based upon
management's best estimates, as well as third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from these plans. The Company does not
have a contingency plan relative to the Year 2000 Problem, although it intends
to develop one before June 30, 1999.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
Independent Auditors' Report............................................................................ 35
Consolidated Balance Sheets as of June 30, 1998 and 1997................................................ 36
Consolidated Statements of Income for Fiscal Years Ended June 30, 1998, 1997, and 1996.................. 37
Consolidated Statements of Stockholders' Equity for Fiscal Years Ended June 30, 1998, 1997, and 1996.... 38
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 1998, 1997, and 1996.......... 39
Notes to Consolidated Financial Statements.............................................................. 40
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Anchor Gaming and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Anchor
Gaming and subsidiaries (the "Company") as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Anchor Gaming and subsidiaries
at June 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
July 31, 1998
35
<PAGE>
ANCHOR GAMING
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 73,187,295 $ 66,427,369
Accounts receivable, net....................................................... 8,977,254 6,358,052
Inventory...................................................................... 3,869,496 3,196,918
Prepaid expenses............................................................... 1,951,947 1,835,913
Other current assets........................................................... 53,688 445,799
-------------- --------------
Total current assets......................................................... 88,039,680 78,264,051
Property and equipment, net.................................................... 94,791,189 85,033,436
Long-term notes receivable, net................................................ 2,234,856 1,543,159
Intangible assets, net......................................................... 3,534,048 2,128,306
Investments in unconsolidated affiliates....................................... 32,638,738 7,570,712
Deposits and other............................................................. 23,895,032 14,336,705
-------------- --------------
Total assets................................................................. $ 245,133,543 $ 188,876,369
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 5,994,029 $ 2,663,156
Accrued salaries, wages and vacation pay....................................... 3,905,951 2,712,764
Income tax payable............................................................. 12,469,108 2,138,934
Other current liabilities...................................................... 11,221,310 6,103,394
-------------- --------------
Total current liabilities.................................................... 33,590,398 13,618,248
Long-term notes payable, principal stockholder................................. -- 2,800,000
Other long-term liabilities.................................................... -- 143,691
Minority interest in consolidated subsidiary................................... 1,061,470 983,562
-------------- --------------
Total liabilities and minority interest in consolidated subsidiary........... 34,651,868 17,545,501
-------------- --------------
Commitments and contingencies.................................................. -- --
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 0 shares issued
and outstanding at June 30, 1998 and 1997.................................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 13,758,375 issued
and 12,593,232 outstanding at June 30, 1998, 13,579,575 issued and 13,052,807
outstanding at June 30, 1997................................................. 137,584 135,796
Additional paid-in capital..................................................... 114,179,417 107,267,684
Treasury stock at cost, 1,165,143 shares at June 30, 1998, 526,768 shares at
June 30, 1997................................................................ (52,731,940) (16,569,329)
Retained earnings.............................................................. 148,896,614 80,496,717
-------------- --------------
Total stockholders' equity................................................... 210,481,675 171,330,868
-------------- --------------
Total liabilities and stockholders' equity................................... $ 245,133,543 $ 188,876,369
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements
36
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Proprietary games operations.................................. $ 113,677,299 $ 49,715,779 $ 21,457,135
Casino operations............................................. 82,138,781 69,223,321 65,125,194
Route operations.............................................. 34,313,802 33,509,497 28,650,989
Other......................................................... 1,801,899 1,300,002 1,233,003
-------------- -------------- --------------
Total revenues.............................................. 231,931,781 153,748,599 116,466,321
-------------- -------------- --------------
Costs and expenses:
Proprietary games operations.................................. 13,475,096 11,039,227 12,113,595
Casino operations............................................. 35,064,884 29,100,285 26,830,475
Route operations.............................................. 21,441,590 19,904,608 17,158,172
Other......................................................... 1,840,507 1,431,734 1,300,012
Selling, general and administrative........................... 41,217,693 28,163,608 21,073,631
Project cost write-downs...................................... -- 2,116,968 --
Depreciation and amortization................................. 12,660,680 8,798,163 4,109,835
-------------- -------------- --------------
Total costs and expenses.................................... 125,700,450 100,554,593 82,585,720
-------------- -------------- --------------
Income from operations.......................................... 106,231,331 53,194,006 33,880,601
-------------- -------------- --------------
Other income (expense):
Interest income............................................... 2,988,422 3,792,739 2,028,347
Interest expense.............................................. (225,811) (287,711) (428,991)
Other income.................................................. 1,157,217 288,703 260,439
Minority interest in earnings of consolidated subsidiary...... (711,324) (310,607) (217,793)
-------------- -------------- --------------
Total other income (expense)................................ 3,208,504 3,483,124 1,642,002
-------------- -------------- --------------
Income before provision for income taxes........................ 109,439,835 56,677,130 35,522,603
Income tax provision............................................ 41,039,938 21,000,702 13,187,559
-------------- -------------- --------------
Net income...................................................... $ 68,399,897 $ 35,676,428 $ 22,335,044
-------------- -------------- --------------
-------------- -------------- --------------
Basic earnings per share........................................ $ 5.36 $ 2.68 $ 1.89
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding............................. 12,750,622 13,321,282 11,819,593
-------------- -------------- --------------
-------------- -------------- --------------
Diluted earnings per share...................................... $ 5.20 $ 2.63 $ 1.86
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average common and common equivalent shares
outstanding................................................... 13,160,524 13,541,515 12,038,344
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements
37
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
--------------------- ------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- --------- ---------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--July 1, 1995............ 11,505,550 $ 115,056 (163,789) $ (1,799,830) $44,031,099 $ 22,485,245 $ 64,831,570
Stock issued for exercise of
options...................... 418,600 4,186 (26,979) (1,296,000) 5,694,414 4,402,600
Shares issued in public
offering..................... 1,550,000 15,500 53,859,015 53,874,515
Tax effects of stock option
transactions................. 863,552 863,552
Net income..................... 22,335,044 22,335,044
---------- --------- ---------- ------------ ------------- ------------ ------------
Balance--June 30, 1996........... 13,474,150 134,742 (190,768) (3,095,830) 104,448,080 44,820,289 146,307,281
Stock issued for exercise of
options...................... 105,425 1,054 1,285,403 1,286,457
Treasury shares purchased...... (336,000) (13,473,499) (13,473,499)
Tax effects of stock option
transactions................. 1,534,201 1,534,201
Net income..................... 35,676,428 35,676,428
---------- --------- ---------- ------------ ------------- ------------ ------------
Balance--June 30, 1997........... 13,579,575 135,796 (526,768) (16,569,329) 107,267,684 80,496,717 171,330,868
Stock issued for exercise of
options...................... 178,800 1,788 2,557,637 2,559,425
Treasury shares purchased...... (638,375) (36,162,611) (36,162,611)
Tax effects of stock option
transactions................. 4,354,096 4,354,096
Net income..................... 68,399,897 68,399,897
---------- --------- ---------- ------------ ------------- ------------ ------------
Balance--June 30, 1998........... 13,758,375 $ 137,584 (1,165,143) $(52,731,940) $114,179,417 $148,896,614 $210,481,675
---------- --------- ---------- ------------ ------------- ------------ ------------
---------- --------- ---------- ------------ ------------- ------------ ------------
</TABLE>
See notes to consolidated financial statements
38
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 68,399,897 $ 35,676,428 $ 22,335,044
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on disposal of assets, including project cost write-downs... 423,009 2,208,878 --
Depreciation and amortization.................................... 12,832,757 8,955,446 4,085,573
Provision for doubtful accounts and notes........................ 685,621 364,000 105,000
Minority interest in earnings of consolidated subsidiary in
excess of cash distributed..................................... 77,908 310,607 217,793
Unconsolidated affiliates' earnings in excess of distributions... (25,068,026) (7,570,712) --
(Increase) decrease in assets:
Accounts receivable.............................................. (3,304,823) (2,001,363) (1,802,054)
Inventory........................................................ (672,578) 1,037 (842,765)
Other current assets............................................. 353,322 (83,898) 34,772
Prepaid expenses................................................. (116,034) (96,650) (105,769)
Deposits and other assets........................................ (9,610,009) 1,964,543 58,925
Increase (decrease) in liabilities:
Accounts payable................................................. 3,330,873 (1,911,057) 2,763,320
Accrued salaries, wages and vacation pay......................... 1,193,187 224,750 380,048
Income tax payable............................................... 14,684,270 2,955,801 776,683
Other liabilities................................................ 4,974,225 2,394,423 762,794
------------- ------------- -------------
Total adjustments.............................................. (216,298) 7,715,805 6,434,320
------------- ------------- -------------
Net cash provided by operating activities............................ 68,183,599 43,392,233 28,769,364
------------- ------------- -------------
Cash flows from investing activities:
Acquisition and construction of property and equipment............. (22,498,825) (38,108,284) (27,916,341)
Expenditures for intangible assets................................. (1,922,338) (488,715) (274,013)
Proceeds from sale of equipment.................................... 53,584 117,254 530,377
Issuance of notes receivable....................................... (2,039,921) (1,405,157) (114,614)
Principal reductions on notes receivable........................... 1,387,013 1,009,408 947,678
Payments to extend operating leases................................ -- -- (5,000,000)
Advances to joint venture.......................................... -- (3,100,000) --
------------- ------------- -------------
Net cash used in investing activities............................ (25,020,487) (41,975,494) (31,826,913)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from sale of stock and warrants....................... 2,559,425 1,321,600 58,277,115
Treasury stock purchases........................................... (36,162,611) (13,473,500) --
Principal payments on loans from related parties................... (2,800,000) -- (3,189,447)
Principal payments on other loans.................................. -- (950,000) (50,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities.............. (36,403,186) (13,101,900) 55,037,668
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................. 6,759,926 (11,685,161) 51,980,119
Cash and cash equivalents, beginning of year......................... 66,427,369 78,112,530 26,132,411
------------- ------------- -------------
Cash and cash equivalents, end of year............................... $ 73,187,295 $ 66,427,369 $ 78,112,530
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................. $ 225,811 $ 257,994 $ 392,643
------------- ------------- -------------
------------- ------------- -------------
Cash paid for income taxes......................................... $ 36,741,793 $ 18,044,900 $ 12,404,763
------------- ------------- -------------
------------- ------------- -------------
Supplemental schedule of noncash investing and financing
transactions:
Stock issued for warrants in cashless exercise..................... $ 1,296,000
Property and equipment acquired by assuming debt................... $ 1,000,000
</TABLE>
See notes to consolidated financial statements
39
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Anchor Gaming ("Anchor" or the "Company") is a diversified gaming company
that seeks to capitalize on its experience as an operator and developer of
gaming machines and casinos by developing gaming oriented businesses. Anchor
develops and distributes unique proprietary games, currently operates two
casinos in Colorado, and operates one of the largest gaming machine routes in
Nevada.
Anchor Gaming was formed July 28, 1993 and completed its initial public
offering ("IPO") in February 1994. Simultaneous with the closing of the IPO,
Anchor became the holding company of Anchor Coin, C.G. Investments, Inc.
("CGI"), Colorado Grande Enterprises, Inc. ("Colorado Grande") and D D Stud,
Inc. ("DD Stud") (collectively the "Subsidiaries"), which were operated under
different ownership structures controlled primarily by Stanley E. Fulton, the
Chairman of the Board, Chief Executive Officer and principal stockholder of
Anchor. Also at the time of the IPO, the Company acquired all of the beneficial
ownership of Global Gaming Products, L.L.C. and certain related assets from
Global Distributors, Inc. (the "Acquisition"), which were primarily involved in
the distribution of the proprietary game Silver Strike. The accounts of the
Subsidiaries are consolidated in the accompanying financial statements. All
significant intercompany accounts and transactions have been eliminated. The
financial position and operating results of Colorado Grande Enterprises, Inc.
are included in the consolidated financial statements as an 80% consolidated
subsidiary.
On April 23, 1996, Anchor completed a secondary offering of 2.3 million
shares of common stock at a price of $37 per share, with 1.55 million of these
shares sold by the Company (the "Secondary Offering") and the remaining 750,000
shares were sold by selling stockholders. Net proceeds to the Company from the
Secondary Offering were $53.9 million.
On October 17, 1997, Anchor completed an offering of 1.8 million shares of
common stock at a price of $91 per share, in which all of the shares were sold
by selling stockholders. The Company did not receive any proceeds from the
offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments purchased with
maturities of three months or less at the date of acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, trade
receivables, and trade payables approximates fair value because of the short
maturities of these instruments. The Company estimates fair value of its
long-term obligations based on quoted market prices or on the current rates
offered to the Company for debt of the same remaining maturities. The estimated
fair values of the obligations closely approximated the carrying values at June
30, 1998 and 1997.
INVESTMENTS IN DEBT SECURITIES
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under Statement of Financial
Accounting Standards ("SFAS") No. 115, are carried on the consolidated balance
sheets in the cash and cash equivalents category. Management determines the
appropriate classification of its investment securities at the time of purchase
as either held-to-maturity, trading, or available for sale and re-evaluates such
determination at each balance sheet date. The Company has classified its
investment securities as of June 30, 1998 and 1997 as held-to-maturity. Held-to-
40
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
maturity securities are required to be carried at amortized cost. The securities
classified as held-to-maturity consist of the following amortized costs at June
30:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Debt securities issued by the U.S. Treasury and other U.S.
government agencies.......................................... $ 55,604,000 $ 52,734,000
</TABLE>
All of the Company's investment securities mature in three months or less
from the date of purchase. The estimated fair value of the Company's portfolio
of investment securities at June 30, 1998 and 1997 approximates amortized cost
due to the short term nature of the portfolio.
ACCOUNTS RECEIVABLE
Accounts receivable result from the sale of products and services to gaming
properties primarily in the United States. The Company performs credit
evaluations of its customers and does not require collateral. Management reviews
customer balances for potential credit losses and maintains an allowance for
amounts deemed uncollectible. The amounts reserved at June 30, 1998 and 1997
were $1,332,404 and $665,605, respectively.
INVENTORY
Inventory consists of silver and silver tokens, parts for gaming machines,
and food and beverage items. Silver inventory of $1,067,381 and $594,615 at June
30, 1998 and 1997, respectively, is classified as raw material. The remainder of
inventory is classified as finished goods. All inventories are stated at the
lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Ordinary maintenance and
repairs are charged to expense as incurred. Costs that materially increase the
life or value of existing assets are capitalized. Assets that have been placed
in service are depreciated over their estimated useful lives or amortized over
their lease terms using either straight-line or accelerated methods. Estimated
useful lives for furniture and equipment are 3 to 7 years, for leasehold
improvements are 4 1/2 years to 31 1/2 years and for buildings and improvements
are 30 years. Property and equipment is evaluated for recoverability under the
requirements of SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" whenever impairment indicators are
present.
INTANGIBLE ASSETS
Intangible assets include goodwill associated with the Acquisition, which is
amortized on a straight-line basis over 10 years, and goodwill associated with
the purchase of assets of an engineering company which is amortized on a
straight-line basis over 3 years. Intangible assets also include amounts paid to
acquire leases for route locations and casino property, amounts to acquire route
participation agreements, costs of patents issued, and organization costs. These
amounts are amortized on a straight-line basis over the lives of the leases or
agreements ranging from 1 to 15 years. Intangible assets are evaluated for
recoverability under the requirements of SFAS No. 121 "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" whenever
impairment indicators are present.
41
<PAGE>
OTHER CURRENT LIABILITIES
Included in other current liabilities are $3,519,000 and $333,000 in
employee royalties payable at June 30, 1998 and 1997, respectively.
REVENUE RECOGNITION
In accordance with industry practice, the Company recognizes gaming revenues
as the net win from gaming operations, which is the difference between amounts
wagered by customers and payments to customers. Proprietary games revenue is
derived from royalty, revenue participation, or other similar short-term
recurring revenue arrangements.
Revenues exclude the retail value of complimentary food and beverage
furnished gratuitously to customers. The estimated departmental costs of
providing such goods and services as included in casino expense are $1,712,219,
$1,365,897, and $1,162,495 for the fiscal years ended June 30, 1998, 1997, and
1996, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in
selling, general, and administrative costs. Research and development costs of
$1,922,000, $2,023,000 and $608,000 were expensed for the fiscal years ended
June 30, 1998, 1997, and 1996, respectively.
RECLASSIFICATIONS
Certain amounts in the June 30, 1997 balance sheet have been reclassified to
be consistent with the balance sheet presentation used at June 30, 1998.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in the financial statements include the
estimated depreciable lives of property and equipment and certain estimated
liabilities and valuation reserves. Actual results could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee issued Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities". This standard provides guidance on the financial
reporting for start-up costs and organization costs. This standard requires
costs of start-up activities and organization costs to be expensed as incurred
and is effective for fiscal years beginning after December 15, 1998, although
earlier application is encouraged. Management believes that this standard could
have a material effect on the Company's consolidated financial statements
depending on the status of the Company's current and future expansion projects
at the time this standard is adopted.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997. This
statement requires companies to classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for financial statements issued for fiscal years beginning
after December 15, 1997. Management does not believe this new standard will have
a material impact on the Company's consolidated financial statements.
42
<PAGE>
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information" was issued in June 1997. This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. The Company believes the segment
information required to be disclosed under SFAS No. 131 will be more
comprehensive than previously provided, including expanded disclosure of income
statement and balance sheet items for each of its reportable segments under SFAS
No. 131.
3. NOTES RECEIVABLE
Notes receivable include notes due from various slot route location owners
with interest rates ranging from 8% to 12% to be paid over periods ranging from
3 months to 20 years. At June 30, 1997, notes receivable also include notes due
from an unaffiliated gaming company and its stockholders for business
development, which accrue interest at the prime rate. These notes were
extinguished during the year ended June 30, 1998. Notes receivable consist of
the following at June 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Loans to unaffiliated gaming companies............................ $ -- $ 610,905
Location loans for operating rights............................... 2,570,848 700,435
Loans to employees................................................ -- 1,200,000
------------ ------------
2,570,848 2,511,340
Less allowance for doubtful accounts.............................. 329,163 922,562
------------ ------------
2,241,685 1,588,778
Less current portion:
Location loans for operating rights............................... 6,829 45,619
------------ ------------
Long-term notes receivable, net................................... $ 2,234,856 $ 1,543,159
------------ ------------
------------ ------------
</TABLE>
Loans to employees at June 30, 1997 consist of a $1.2 million line of credit
arrangement with an entity controlled by an employee of the Company. Loans
outstanding under the line of credit bear interest at prime rate plus 1%. These
loans were paid in full during the year ended June 30, 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Land and improvements........................................ $ 17,576,170 $ 15,316,178
Buildings and improvements................................... 13,326,479 13,023,440
Gaming equipment............................................. 80,362,267 61,641,351
Furniture, fixtures and equipment............................ 6,905,138 5,144,212
Leasehold improvements....................................... 6,282,043 6,143,415
Construction in progress..................................... -- 1,496,089
-------------- --------------
124,452,097 102,764,685
Less accumulated depreciation................................ 29,660,908 17,731,249
-------------- --------------
Total.................................................... $ 94,791,189 $ 85,033,436
-------------- --------------
-------------- --------------
</TABLE>
On November 11, 1996, the Company announced that it was re-evaluating the
scope and nature of its proposed addition of a new casino across the street from
the Colorado Central Station Casino. During the fourth quarter of the year ended
June 30, 1997, the Company determined that it was necessary to recognize a
write-down of costs associated with the new casino in the amount of $2,116,968.
The costs were
43
<PAGE>
specifically related to architectural fees, building design costs, and deferred
rent that were determined to have no future benefit.
5. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Lease acquisition costs........................................... $ 2,408,951 $ 2,312,951
Goodwill.......................................................... 2,911,253 1,134,865
Patents........................................................... 98,595 98,595
Organization costs and other...................................... 221,310 221,310
------------ ------------
5,640,109 3,767,721
Less accumulated amortization..................................... 2,106,061 1,639,415
------------ ------------
Total......................................................... $ 3,534,048 $ 2,128,306
------------ ------------
------------ ------------
</TABLE>
During the year ended June 30, 1998, the Company purchased the assets of an
engineering company, owned by an employee of the Company, that had previously
been developing products for the exclusive use of the Company in its proprietary
games operations. The total purchase price of $2,041,000 exceeded the fair value
of the identifiable assets by $1,776,000. The excess purchase price is recorded
as goodwill and is being amortized over three years on a straight-line basis.
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has investments in unconsolidated affiliates that are accounted
for under the equity method. Under the equity method, original investments are
recorded at cost and adjusted by the Company's share of earnings, losses and
distributions of these affiliates. Investments in unconsolidated affiliates
consist primarily of a 50% interest in a joint venture (the "Joint Venture")
with International Game Technology ("IGT"). The primary business of the Joint
Venture is to distribute gaming machines on wide-area progressive systems. The
Company's share of net earnings from the Joint Venture are included in revenue
from proprietary games operations.
The Joint Venture operates on a September 30 year-end and began operations
during the quarter ended March 31, 1997. Summarized results of operations of the
Joint Venture for the year ended June 30, 1998 and the period from inception
through June 30, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Revenues...................................................... $ 212,237,000 $ 21,532,000
Expenses...................................................... 99,572,000 12,465,000
Operating income.............................................. 112,665,000 9,067,000
Net income.................................................... 113,323,000 9,109,000
</TABLE>
Summarized balance sheet information of the Joint Venture as of June 30 is
as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current assets................................................. $ 66,665,000 $ 22,115,000
Property and other long-term assets, net....................... 84,282,000 16,001,000
Current liabilities............................................ 16,640,000 15,097,000
Long-term debt and other liabilities........................... 67,519,000 7,967,000
Equity......................................................... 66,788,000 15,052,000
</TABLE>
44
<PAGE>
The Joint Venture is subject to various risks and uncertainties including,
but not limited to, gaming regulatory requirements. The Company's Annual Report
on Form 10-K includes a comprehensive set of the Company's risk factors,
including those related to the Joint Venture. The Joint Venture's operations are
subject to the licensing and regulatory requirements of multiple jurisdictions
throughout the United States and Canada. The Company's, IGT's and the Joint
Venture's gaming licenses are subject to certain conditions and periodic
renewal. Management believes that the conditions will continue to be satisfied
and that subsequent license renewals will be granted.
7. NOTES PAYABLE PRINCIPAL STOCKHOLDER
Notes payable to the principal stockholder of $2,800,000 at June 30, 1997
consist of unsecured notes payable bearing interest at 8% that were due July 1,
1998. The notes were paid in full during the year ended June 30, 1998. Notes
payable to the principal stockholder resulted in interest expense of $223,693,
$223,693, and $289,373 for the years ended June 30, 1998, 1997, and 1996,
respectively, and accrued interest payable of $18,400 at June 30, 1997.
8. OTHER DEBT
In April 1997, the Company entered into a $10 million unsecured revolving
bank line of credit (the "Bank Revolver") expiring November 30, 1998. The Bank
Revolver bears interest at the prime rate, or LIBOR plus 2%, at the Company's
option. The Company has agreed to maintain certain financial and non-financial
covenants customary with lending arrangements of this type. Financial covenants
include maintenance of minimum cash and cash equivalent balances, tangible net
worth, annual EBITDA, and maximum funded debt to EBITDA ratio. The covenants
also restrict payment of cash dividends. The Company has remained in compliance
with the covenants throughout the term of the credit facility. As of June 30,
1998, the Company had not borrowed under the Bank Revolver.
9. EARNINGS PER SHARE
During the year ended June 30, 1998, the Company adopted SFAS No. 128
"Earnings per Share." This statement established standards for computing and
presenting earnings per share and required restatement of all prior-period
earnings per share data presented. A reconciliation of income and shares for
basic and diluted earnings per share (EPS) for the years ended June 30 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------ ------------------------------------ ---------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES
---------- --------- ------------- ---------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income............. $68,399,897 12,750,622 $ 5.36 $35,676,428 13,321,282 $ 2.68 $22,335,044 11,819,593
Effect of Dilutive
Securities:
Options................ -- 409,902 ( .16) -- 220,233 ( .05) -- 218,751
---------- --------- ----- ---------- --------- ----- ---------- ---------
Diluted EPS:
Net Income............. $68,399,897 13,160,524 $ 5.20 $35,676,428 13,541,515 $ 2.63 $22,335,044 12,038,344
---------- --------- ----- ---------- --------- ----- ---------- ---------
---------- --------- ----- ---------- --------- ----- ---------- ---------
<CAPTION>
PER-SHARE
AMOUNT
-------------
<S> <C>
Basic EPS:
Net income............. $ 1.89
Effect of Dilutive
Securities:
Options................ ( .03)
-----
Diluted EPS:
Net Income............. $ 1.86
-----
-----
</TABLE>
10. OPTIONS AND WARRANTS
As of June 30, 1998, 1,085,000 shares of common stock were reserved for
issuance upon exercise of employee and director stock options under an employee
stock option plan. Employee and director options to purchase 1,054,500 shares at
the fair market values at the grant dates have been granted as of June 30, 1998.
As of June 30, 1998, options to purchase 541,275 shares had been exercised. Of
the 1,054,500 options, 100,000 vest in equal quarterly increments over two
years, 93,000 vest in equal annual increments over five years, 50,000 vest in a
single installment six months after issuance, 20,000 vest in decreasing
45
<PAGE>
annual increments over five years, 250,000 vest in varying increments and
periods over five years, 8,000 vest at the end of three years, 25,000 vest in
equal annual installments over ten years, 99,000 vest in three equal
installments over five years and the remainder vest in equal quarterly
increments over five years.
An additional 40,000 shares are reserved for issuance upon exercise of
vested options at the IPO price that were granted to a relative of certain
minority stockholders (none of which were exercised at June 30, 1998), and
250,000 shares are reserved for issuance upon exercise of vested warrants
granted to the managing underwriters of the IPO (and their designees)
exercisable at 120% of the IPO price, all of which were exercised at June 30,
1998.
Options to purchase an additional 600,000 shares were granted at the fair
market value at the grant date to certain employees outside of the employee
stock option plan. These options vest in varying increments over periods from
nine months to eight years.
Summarized information for all options is as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- --------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of the
year.............................. 1,133,025 $ 24.98 670,700 $ 17.79 820,300 $ 12.95
Granted........................... 124,000 56.03 600,000 31.88 288,000 25.07
Exercised......................... (178,800) 14.31 (105,425) 12.54 (418,600) 13.57
Canceled.......................... (17,300) 31.57 (32,250) 44.44 (19,000) 12.00
--------- ------ --------- ------ --------- ------
Outstanding, end of the year........ 1,060,925 $ 30.30 1,133,025 $ 24.98 670,700 $ 17.79
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Exercisable at end of the year...... 271,675 $ 21.51 245,475 $ 16.11 148,050 $ 12.31
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Options available for grant......... 82,800 189,500 107,250
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table summarizes information about the options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE AT JUNE 30, REMAINING EXERCISE AT JUNE 30, EXERCISE
PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
- ---------------------- ----------- ------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 12.00 - $13.50 124,625 5.6 $ 12.21 85,875 $ 12.22
14.75 - 21.75 211,800 7.0 21.69 110,800 21.70
31.88 - 46.88 608,000 8.7 32.07 75,000 31.88
55.75 - 72.88 116,500 9.5 56.04 -- --
--
----------- ------ ------------- ------
1,060,925 8.1 $ 30.30 271,675 $ 21.51
--
--
----------- ------ ------------- ------
----------- ------ ------------- ------
</TABLE>
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01
par value per share (the "Preferred Stock"), in one or more series, and to
designate the rights, preferences, limitations, and restrictions of and upon
shares of each series, including voting, redemption, and conversion rights. The
board of directors of the Company also may designate dividend rights and
preferences in liquidation.
During the fiscal year ended June 30, 1998, the board of directors of Anchor
authorized the Company to enter into a Stockholder Rights Plan (the "Rights
Plan") providing that one right (a "Right") will be attached to each share of
Common Stock as of a record date to be determined by the board of directors of
Anchor (the "Record Date"). In connection with the authorization of the Rights
Plan, the board of directors of the Company has authorized the designation of
50,000 shares of Preferred Stock as Series A Junior Participating Preferred
Stock with a par value of $20.00 per share. Each Right under the Rights Plan
will entitle the registered holder to purchase from the Company a unit (a
"Unit") consisting of one
46
<PAGE>
one-thousandth of a share of Series A Junior Participating Preferred stock at a
purchase price of $400 per Unit, subject to adjustment. The Rights convert in
certain circumstances into a right to purchase common stock or securities of a
successor entity. The Rights Plan is filed as Exhibit 4.2 to the Company's
Annual Report on Form 10-K.
The Company has adopted the disclosures-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company applies APB Opinion No.
25 and related interpretations in accounting for its stock options. Under APB
No. 25, no compensation cost has been recognized in the financial statements for
the Stock Option Plan or other stock options granted. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. Had compensation cost for the stock option grants been
determined based on the fair value at the date of grant for awards consistent
with the provision of SFAS No. 123, the Company's net income per common and
common equivalent share would have decreased to the pro forma amounts indicated
below for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income--as reported......................... $ 68,399,897 $ 35,676,428 $ 22,335,044
Net income--pro forma........................... 66,946,613 34,940,303 21,758,657
Basic earnings per share--as reported........... $ 5.36 $ 2.68 $ 1.89
Basic earnings per share--pro forma............. 5.25 2.62 1.84
Diluted earnings per share--as reported......... 5.20 2.63 1.86
Diluted earnings per share--pro forma........... 5.09 2.58 1.81
</TABLE>
The fair value of each option granted in fiscal years 1998, 1997 and 1996
was estimated using the following assumptions for the Black-Scholes option
pricing model: (i) no dividends; (ii) expected volatility of 60% for 1998 and
50% for 1997 and 1996; (iii) risk free interest rates averaging 6% for all
years; and (iv) an expected average life of 4.6 years for 1998, 3.6 years for
1997 and 3.2 years for 1996. The weighted average fair value of the options
granted in 1998, 1997 and 1996 were $30.00, $9.82 and $9.03, respectively.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma net income may not be
representative of that to be expected in future years.
11. OTHER RELATED PARTY TRANSACTIONS
The principal stockholder of the Company owned 100% of the common stock of
an Anchor Gaming slot route location. On January 31, 1996, the principal
stockholder sold the location to an unaffiliated third party. For providing the
gaming machines and slot route services, the Company received a percentage of
the net win of the location similar to other route locations. The Company held a
note receivable from the slot route operation in the amount of $284,704 at
January 31, 1996 of which $257,562 was assumed by the new owner. The remaining
balance of the loan due from the principal stockholder at June 30, 1996 of
$27,142 was paid in full on July 11, 1996. The slot route operation, under the
ownership of the principal stockholder, accounted for $180,822 of gaming revenue
and $145,684 of route costs during the year ended June 30, 1996.
In August 1996, the Company made certain payments to an entity controlled by
an employee of the Company. These funds were used to repay a debt of $500,000
owed by the employee and his affiliate to the principal stockholder of the
Company.
47
<PAGE>
12. INCOME TAXES
The provision for income taxes for the years ended June 30, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Currently payable per tax return:
Federal....................................... $ 47,257,634 $ 20,066,284 $ 11,750,029
State......................................... 4,168,430 1,369,887 846,278
------------- ------------- -------------
51,426,064 21,436,171 12,596,307
------------- ------------- -------------
Deferred:
Federal....................................... (9,510,554) (399,219) 579,569
State......................................... (875,572) (36,250) 11,683
------------- ------------- -------------
(10,386,126) (435,469) 591,252
------------- ------------- -------------
Total....................................... $ 41,039,938 $ 21,000,702 $ 13,187,559
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The historical provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pre-tax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rate........................ $ 38,303,942 35.0% $ 19,836,995 35.0% $ 12,432,911 35.0%
Increase in tax resulting from:
State income taxes, net of federal tax
effect..................................... 2,140,358 2.0 866,864 1.5 557,674 1.6
Other, net................................... 595,638 .5 296,843 .6 196,974 .5
------------- --- ------------- --- ------------- ---
Actual provision for income taxes.............. $ 41,039,938 37.5% $ 21,000,702 37.1% $ 13,187,559 37.1%
------------- --- ------------- --- ------------- ---
------------- --- ------------- --- ------------- ---
</TABLE>
SFAS No. 109 "Accounting for Income Taxes" requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or income tax
returns. Deferred income taxes included in other current assets, deposits and
other, and other long-term liabilities on the consolidated balance sheets
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The tax items comprising the Company's net
deferred tax asset as of June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Deferred tax assets:
Receivable reserve............................................. $ 1,048,000 $ 617,000
Pre-opening expenditures....................................... 33,000 86,000
Expenses not currently deductible.............................. 10,832,000 417,000
------------- ------------
11,913,000 1,120,000
Deferred tax liabilities:
Difference between book and tax basis of property.............. (1,283,000) (876,000)
------------- ------------
Net deferred tax asset........................................... $ 10,630,000 $ 244,000
------------- ------------
------------- ------------
</TABLE>
48
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
NON-CANCELABLE OPERATING LEASES:
The Company leases parking lot space, office space, casino space, and slot
route locations under non-cancelable operating leases. The original terms of the
leases range from 3 to 15 years with various renewal options from 1 to 15 years.
The casino space lease has contingent rentals based on gaming revenues of
the casino occupying the space. The lease provides for a monthly payment of the
greater of a base amount of $12,000 or 5% of adjusted gross gaming revenue, with
a payment ceiling of $400,000 per year. Contingent rentals paid above base
amounts were $256,000, $254,472 and $184,312 for the years ended June 30, 1998,
1997, and 1996, respectively.
Future minimum rentals under non-cancelable operating leases at June 30,
1998 are:
<TABLE>
<S> <C>
Year ending June 30,
1999........................................................ $11,732,000
2000........................................................ 9,125,000
2001........................................................ 8,973,000
2002........................................................ 8,923,000
2003........................................................ 8,923,000
Thereafter.................................................. 55,184,000
-----------
$102,860,000
-----------
-----------
</TABLE>
Operating lease rental expense was $11,878,000, $10,940,000, and $9,539,000
for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
Included in deposits at June 30, 1998 and 1997 is a space lease deposit of
$3,300,000, which is held by the lessor of several slot route locations pursuant
to an agreement that provides that the deposit, or any portion thereof, may, at
the option of the Company, be applied against rents owing during the last two
years of the lease agreement. Also included in deposits are payments totaling
$10,750,000 to this lessor to extend the lease term for these locations through
the year 2010. The lease extension payments are amortized to rent expense on a
straight-line basis over the remaining term of the lease. The Company's slot
route operations at locations leased from this lessor accounted for more than
10% of the Company's total revenues for the years ended June 30, 1997 and 1996.
GAMING REGULATIONS
The Company's route operations are subject to the licensing and regulatory
requirements of the Nevada State Gaming Control Board and the Nevada Gaming
Commission. The Company's casino operations are subject to the licensing and
regulatory requirements of the Colorado Limited Gaming Control Commission. The
Company's proprietary games operations are subject to the licensing and
regulatory requirements of multiple jurisdictions throughout the United States
and Canada including the Nevada and Colorado requirements. The Company's gaming
licenses are subject to certain conditions and periodic renewal. Management
believes that the conditions will continue to be satisfied and that subsequent
license renewals will be granted.
49
<PAGE>
ENVIRONMENTAL MATTERS
The Colorado Central Station Casino is located in an area that has been
designated by the Environmental Protection Agency ("EPA") as a superfund site on
the National Priorities List, known as the Central City-Clear Creek Superfund
Site (the "Site") as a result of contamination from historic mining activity in
the area. The EPA is entitled to proceed against owners and operators of
properties located within the Site for remediation and response costs associated
with their properties and with the entire Site. The Colorado Central Station
Casino is located within the drainage basin of North Clear Creek and is
therefore subjected to potentially contaminated surface and ground water from
upstream mining-related sources. Soil and ground water samples on the Site
indicate that several contaminants exist in concentrations exceeding drinking
water standards. Records relating to historical uses of the Site are uncertain
as to whether mining actually occurred below the Company's property. Records do
indicate that an ore loading dock for a railroad depot was once located on an
adjacent property, and railroad tracks were present on the Company's property.
Management is not aware of any environmental issues associated with these
activities. The Company applied the guidance in Statement of Position 96-1
"Environmental Remediation Liabilities" and determined that a liability has not
been incurred as the criteria of this standard have not been met.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with six executives and
top management personnel. The agreements vary in starting date and are for
periods ranging from two to five years. Agreements with aggregate annual
salaries of $1,315,000 are terminable at the Company's option with 90 days to
one year severance pay.
LITIGATION
Several securities class action lawsuits have been filed against the Company
and certain of its current and former officers and directors. The lawsuits were
filed in various jurisdictions following the Company's announcement in early
December 1997 that the Company's results for the December quarter might not meet
analysts' expectations. The lawsuits have been brought on behalf of certain
purchasers of the stock of the Company and allege violations of state and/or
federal securities laws arising out of alleged misstatements and omissions to
state material facts about the Company over various periods of time covered by
the lawsuits. The lawsuits have all been consolidated in Nevada, both in federal
and state court. The consolidated federal action is captioned IN RE ANCHOR
GAMING SECURITIES LITIGATION, Civil Action No. CV-S-97-01751-PMP (RJJ), and the
consolidated state action is captioned RYAN, ET AL. V. ANCHOR GAMING, ET AL.,
Civil No. A383456. Certain other actions have been transferred and/or dismissed.
The Company believes that the claims are without merit, and the Company intends
to vigorously contest the lawsuits. The consolidated state court action has been
stayed by order of the court.
PURCHASE COMMITMENTS
At June 30, 1998, the Company had entered into various purchase agreements
to purchase gaming equipment for approximately $2,734,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the Company's proxy statement for the
November 23, 1998 Annual Meeting of Stockholders under the caption
"Management-Directors and Executive Officers."
50
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the Company's proxy statement for the
November 23, 1998 Annual Meeting of Stockholders under the caption "Executive
Compensation and Other Information", provided that the Performance Graph and the
Compensation Committee Report on Executive Compensation are expressly not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the Company's proxy statement for the
November 23, 1998 Annual Meeting of Stockholders under the caption "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the Company's proxy statement for the
November 23, 1998 Annual Meeting of Stockholders under the caption "Executive
Compensation and Other Information-Compensation Committee Interlocks and Insider
Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)The following documents are filed as part of this Report:
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Income for the fiscal years ended June 30,
1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity for the fiscal years ended
June 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the fiscal years ended June 30,
1998, 1997, and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2)The following accountants' reports and financial schedules for fiscal
years ending June 30, 1998, 1997, and 1996 are submitted herewith:
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable
(a)(3)Management Contract or Compensatory Plan
See Index to Exhibits. Each of the following Exhibits described on the
Index to Exhibits is a management contract or compensatory plan: Exhibits
10.10 through 10.28, 10.32 through 10.36 and 10.38 through 10.40.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of the
fiscal year ended June 30, 1998
(c) Exhibits
See Index to Exhibits.
(d) Financial Statement Schedule filed in Part IV of this report is as follows:
SCHEDULES:
II--Valuation and Qualifying Accounts--Years Ended June 30, 1998, 1997, and
1996.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Anchor Gaming has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
ANCHOR GAMING
By: /s/ STANLEY E. FULTON
-----------------------------------------
Stanley E. Fulton
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER AND ACTING CHIEF FINANCIAL OFFICER
By: /s/ GEOFFREY A. SAGE
-----------------------------------------
Geoffrey A. Sage
CORPORATE CONTROLLER AND
PRINCIPAL ACCOUNTING OFFICER
</TABLE>
Date: September 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ STANLEY E. FULTON
- ------------------------------ Director September 22, 1998
Stanley E. Fulton
/s/ STUART D. BEATH
- ------------------------------ Director September 22, 1998
Stuart D. Beath
/s/ ELIZABETH F. JONES
- ------------------------------ Director September 22, 1998
Elizabeth F. Jones
/s/ GLEN J. HETTINGER
- ------------------------------ Director September 22, 1998
Glen J. Hettinger
/s/ MICHAEL B. FULTON
- ------------------------------ Director September 22, 1998
Michael B. Fulton
/s/ MICHAEL D. RUMBOLZ
- ------------------------------ Director September 22, 1998
Michael D. Rumbolz
</TABLE>
52
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
<C> <S>
2.1 Reorganization Agreement (the "Reorganization Agreement") among Anchor Gaming, Anchor Coin, D D Stud,
Inc., C. G. Investments, Inc., Colorado Grande Enterprises, Inc., New AC, New DD, New CG, and certain
stockholders of such corporations. (Incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
2.2 Amendment No. 1 to the Reorganization Agreement, dated as of January 25, 1993. (Incorporated by reference
to Exhibit 2.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-71870)).
2.3 Purchase Agreement (Global Gaming Products, L.L.C.) between Stanley E. Fulton, William Randall Adams,
Global Products, Inc., Michael S. Stone, Thomas J. Matthews, James R. Purdy, and Anchor Gaming, dated
as of December 22, 1993. (Incorporated by reference to Exhibit 2.3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-71870)).
2.4 Purchase Agreement (Global Gaming Distributors, Inc.) between Global Gaming Distributors, Michael S.
Stone, Thomas J. Matthews, James R. Purdy, and Anchor Gaming, dated as of December 22, 1993.
(Incorporated by reference to Exhibit 2.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-71870)).
3.1 Restated Articles of Incorporation of Anchor Gaming. (Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-71870)).
3.2 Restated Bylaws of Anchor Gaming. (Incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-71870)).
4.1 Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
4.2* Rights Agreement between the Company and the Rights Agent.
4.3* Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock.
9.1 Irrevocable Proxy of Elizabeth F. Jones in favor of Stanley E. Fulton. (Incorporated by reference to
Exhibit 9.1 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
9.2 Irrevocable Proxy of Lucinda F. Tischer in favor of Stanley E. Fulton. (Incorporated by reference to
Exhibit 9.2 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
9.3 Irrevocable Proxy of Stanley M. Fulton in favor of Stanley E. Fulton. (Incorporated by reference to
Exhibit 9.3 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
9.4 Irrevocable Proxy of Deborah J. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.4 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124))
9.5 Irrevocable Proxy of Elizabeth F. Jones in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.5 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
9.6 Irrevocable Proxy of Stanley M. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.6 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
9.7 Irrevocable Proxy of Michael B. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.7 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
</TABLE>
53
<PAGE>
<TABLE>
<C> <S>
9.8 Irrevocable Proxy of Lucinda F. Tischer in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.8 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
9.9 Irrevocable Proxy of Virginia L. Fulton in favor of Stanley E. Fulton (Incorporated by reference to
Exhibit 9.9 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
10.1 Settlement Agreement between Anchor Gaming, Stanley E. Fulton, and Michael B. Fulton, dated as of
December 22, 1993. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement
on Form S-1 (Registration No. 33-71870)).
10.2 Commercial Note of Pelican Gaming, Inc. to Anchor Coin dated March 15, 1995. (Incorporated by reference
to Exhibit 10.1 to the Company's March 31, 1994 Quarterly Report on Form 10-Q (File No. 0-23124)).
10.3 Promissory Notes of Anchor Coin, D D Stud, Inc., and C. G. Investments, Inc. to Stanley E. Fulton.
(Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-71870)).
10.4 Loan Agreement of Pelican Gaming, Inc. to Anchor Coin dated as of March 15, 1994. (Incorporated by
reference to Exhibit 10.2 to the Company's March 31, 1994 Quarterly Report on Form 10-Q (File No.
0-23124)).
10.5 Promissory Note of Colorado Grande Enterprises, Inc. to C.G. Investments, Inc. (Incorporated by reference
to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 33-71870)).
10.6 Promissory Notes of Anchor Coin to Michael B. Fulton, Stanley M. Fulton, Elizabeth Fulton Jones, Lucinda
Fulton Tischer, Virginia L. Fulton, and Deborah J. Fulton. (Incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form S-1 (Registration No. 33-71870)).
10.7 Promissory Note of Anchor Coin to Elizabeth Fulton and related Stock Option Agreement. (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
10.8 Loan Agreement between Bank of America Nevada and Anchor Coin, dated as of June 13, 1994. (Incorporated
by reference to Exhibit 10.6 to the Company's June 30, 1994 Annual Report on Form 10-K (File No.
0-23124)).
10.9 Lease and Sublease Agreement between Smith's Food & Drug Centers, Inc. and Anchor Coin, dated July 28,
1993. (Confidential Treatment for a portion of this document was requested and granted pursuant to Rule
406 under the Securities Act). (Incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
10.10 Employment Agreement between Anchor Gaming and Stanley E. Fulton. (Incorporated by reference to Exhibit
10.10 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.11 Employment Agreement between Anchor Gaming and Michael S. Stone. (Incorporated by reference to Exhibit
10.11 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.12 Employment Agreement between Anchor Gaming and Thomas J. Matthews. (Incorporated by reference to Exhibit
10.12 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.13 Employment Agreement between Anchor Gaming and Joseph Murphy. (Incorporated by reference to Exhibit 10.13
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.14 Employment Agreement between Anchor Gaming and James R. Purdy. (Incorporated by reference to Exhibit
10.14 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
</TABLE>
54
<PAGE>
<TABLE>
<C> <S>
10.15 Employment Agreement between Anchor Gaming and Nick E. Greenwood. (Incorporated by reference to Exhibit
10.15 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.16 Employment Agreement between Anchor Gaming and William Randall Adams. (Incorporated by reference to
Exhibit 10.16 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.17 Employment Agreement between Anchor Gaming and Salvatore T. DiMascio. (Incorporated by reference to
Exhibit 10.17 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.18 Option Agreement between Michael S. Stone and Anchor Gaming. (Incorporated by reference to Exhibit 10.18
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.19 Option Agreement between Thomas J. Matthews and Anchor Gaming. (Incorporated by reference to Exhibit
10.19 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.20 Option Agreement between Joseph Murphy and Anchor Gaming. (Incorporated by reference to Exhibit 10.20 to
the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.21 Option Agreement between William Randall Adams and Anchor Gaming. (Incorporated by reference to Exhibit
10.21 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.22 Option Agreement between Nick E. Greenwood and Anchor Gaming. (Incorporated by reference to Exhibit 10.22
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.23 Option Agreement between James R. Purdy and Anchor Gaming. (Incorporated by reference to Exhibit 10.23 to
the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.24 Option Agreement between Salvatore T. DiMascio and Anchor Gaming. (Incorporated by reference to Exhibit
10.24 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.25 Option Agreement between Anchor Gaming and Geoffrey A. Sage. (Incorporated by reference to Exhibit 10.25
to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.26 Option Agreement between the Company and Stuart D. Beath. (Incorporated by reference to Exhibit 10.26 to
the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.27 Option Agreement between the Company and Garret A. Scholz. (Incorporated by reference to Exhibit 10.27 to
the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.28 Form of Stock Option Agreement between the Company and Glen J. Hettinger (Incorporated by reference to
Exhibit 10.28 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
10.29 Form of Indemnification Agreement between the Company and Officers and Directors. (Incorporated by
reference to Exhibit 10.28 to the Company's June 30, 1994 Annual Report on Form 10-K (File No.
0-23124)).
10.30* Indemnification Agreement between the Company and Glen J. Hettinger
10.31 Tax Indemnification Agreement between Stanley E. Fulton, Anchor Gaming and its subsidiaries.
(Incorporated by reference to Exhibit 10.29 to the Company's June 30, 1994 Annual Report on Form 10-K
(File No. 0-23124)).
</TABLE>
55
<PAGE>
<TABLE>
<C> <S>
10.32 Option Agreement between the Company and Elizabeth Fulton. (Incorporated by reference to Exhibit 10.30 to
the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.33 Option Agreement between the Company and Michael D. Rumbolz. (Incorporated by reference to Exhibit 10.31
to the Company's June 30, 1995 Annual Report on Form 10-K (File No. 0-23124)).
10.34 Employment Agreement between the Company and Michael D. Rumbolz. (Incorporated by reference to Exhibit
10.31 to the Company's June 30, 1995 Annual Report on Form 10-K (File No. 0-23124)).
10.35 Anchor Gaming 1995 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.31 to the
Company's June 30, 1995 Annual Report on Form 10-K (File No. 0-23124)).
10.36 Addendum Agreement to amend the Employment and Stock Option Agreements between the Company and Salvatore
T. DiMascio (Incorporated by reference to Exhibit 10.34 to the Company's June 30, 1996 Annual Report on
Form 10-K (File No. 0-23124)).
10.37 Joint Venture Agreement, dated as of December 3, 1996 by and between Anchor Games, a d.b.a. of Anchor
Coin, a Nevada corporation and Subsidiary of the Company, and IGT. (Incorporated by reference to
Exhibit 10.28 to the Company's June 30, 1996 Annual Report on Form 10-K (File No. 0-23124)).
10.38 Stock Option Agreement of William Adams dated April 2, 1997 (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (File No. 333-53257)).
10.39 Stock Option Agreement of Thomas J. Matthews dated April 2, 1997 (Incorporated by reference to Exhibit
4.2 to the Company's Registration Statement on Form S-8 (File No. 333-53257)).
10.40 Stock Option Agreement of Joseph Murphy dated April 2, 1997 (Incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-8 (File No. 333-53257)).
21.1* List of Subsidiary Corporations.
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
56
<PAGE>
ANCHOR GAMING
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COST AND OTHER BALANCE AT
DESCRIPTION YEAR EXPENSES ADJUSTMENTS END OF YEAR
- -------------------------------------------------------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Allowance for doubtful accounts (deducted from accounts
receivable)........................................... $ 80,821 $ 198,000 $ -- $ 278,821
Allowance for doubtful accounts (deducted from notes
receivable)........................................... 842,147 99,022(3) (20,000)(1) 915,369
(5,800)(2)
------------ ---------- ----------- ------------
$ 922,968 $ 297,022 $ (25,800) $ 1,194,190
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
Year ended June 30, 1997:
Allowance for doubtful accounts (deducted from accounts
receivable)........................................... $ 278,821 $ 437,784 $ (51,000)(2) $ 665,605
Allowance for doubtful accounts (deducted from notes
receivable)........................................... 915,369 21,883(3) (14,690)(2) 922,562
------------ ---------- ----------- ------------
$ 1,194,190 $ 459,667 $ (65,690) $ 1,588,167
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
Year Ended June 30, 1998:
Allowance for doubtful accounts (deducted from accounts
receivable)........................................... $ 665,605 $ 812,544 $(145,745)(2) $ 1,332,404
Allowance for doubtful accounts (deducted from notes
receivable)........................................... 922,562 32,798 (15,292)(2) 329,163
(610,905)(1)
------------ ---------- ----------- ------------
$ 1,588,167 $ 845,342 $(771,942) $ 1,661,567
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
- ------------------------
(1) Amounts deemed to be uncollectible
(2) Amounts recovered
(3) Primarily charged to development costs included in selling, general, and
administrative expenses
57
<PAGE>
ANCHOR GAMING
and
THE CHASE MANHATTAN BANK,
as Rights Agent
Rights Agreement
October 17, 1997
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Section
<S> <C>
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . 5
3. Issue of Rights Certificates. . . . . . . . . . . . . . . . . . . . . . 5
4. Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . 7
5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . 8
6. Transfer, Split Up, Combination, and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost, or
Stolen Rights Certificates. . . . . . . . . . . . . . . . . . . . . . . 9
7. Exercise of Rights; Purchase Price;
Expiration Date of Rights . . . . . . . . . . . . . . . . . . . . . . . 10
8. Cancellation and Destruction of Rights Certificates . . . . . . . . . . 12
9. Reservation and Availability of
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10. Preferred Stock Record Date . . . . . . . . . . . . . . . . . . . . . . 14
11. Adjustment of Purchase Price, Number, and Kind of Shares or
Number of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
12. Certificate of Adjusted Purchase Price or Number of Shares. . . . . . . 26
13. Consolidation, Merger, or Sale or Transfer of Assets or Earning Power . 26
14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . 29
15. Rights of Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . 31
17. Rights Certificate Holder Not Deemed a Stockholder. . . . . . . . . . . 31
18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . 32
<PAGE>
<S> <C>
19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . 32
20. Duties of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . 33
21. Change of Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . 35
22. Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . 36
23. Redemption and Termination. . . . . . . . . . . . . . . . . . . . . . . 37
24. Notice of Certain Events. . . . . . . . . . . . . . . . . . . . . . . . 38
25. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
26. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . . . 40
27. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
28. Determinations and Actions by the Board of Directors, Etc.. . . . . . . 41
29. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . . . 41
30 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
31. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
32. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
33. Descriptive Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
Exhibit A -- Form of Certificate of Designation, Preferences, and Rights
Exhibit B -- Form of Rights Certificate
Exhibit C -- Form of Summary of Rights
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of October 17, 1997 (the "AGREEMENT"), between
Anchor Gaming, a Nevada corporation (the "COMPANY"), and The Chase Manhattan
Bank, a bank chartered by the State of New York (the "RIGHTS AGENT").
BACKGROUND
On August 26, 1997 (the "RIGHTS DIVIDEND DECLARATION DATE"), the Board of
Directors of the Company authorized and declared a dividend distribution of one
Right for each share of common stock, par value $.01 per share, of the Company
(the "COMMON STOCK") outstanding at the Close of Business on October 20, 1997
(the "RECORD DATE"), and has authorized the issuance of one Right (as such
number may be adjusted pursuant to the provisions of SECTION 11(p)) for each
share of Common Stock of the Company issued between the Record Date (whether
originally issued or delivered from the Company's treasury) and the Distribution
Date, each Right initially representing the right to purchase one one-thousandth
of a share of Series A Junior Participating Preferred Stock of the Company
having the rights, powers, and preferences set forth in the form of Certificate
of Designation, Preferences, and Rights attached to this Agreement as EXHIBIT A,
upon the terms and subject to the conditions set forth below (the "RIGHTS");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth in this Agreement, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "ACQUIRING PERSON" means any Person that, together with all
Affiliates and Associates of such Person, is the Beneficial Owner of 15% or
more of the shares of Common Stock then outstanding, but does not include
(i) the Company; (ii) any Subsidiary of the Company; (iii) any employee
benefit plan of the Company or of any Subsidiary of the Company; (iv) any
Person organized, appointed, or established by the Company for or pursuant
to the terms of any such plan; (v) Stanley E. Fulton ("FULTON"), any
transferee or donee from Fulton after the Record Date in a transaction not
involving a public offering of the Common Stock, or any heir or successor
to Fulton upon his death, or any trust established by Fulton for charitable
or estate planning purposes; (vi) any Person that has reported or is
required to report such beneficial ownership (but less than 18%) on
Schedule 13G (or any comparable or successor report) or on Schedule 13D
under the Exchange Act (or any comparable or successor report) under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), which
1
<PAGE>
Schedule 13D does not state any intention to, or reserve the right to,
control or influence the management or policies of the Company or engage in
any of the actions specified in Item 4 of such Schedule 13D (other than the
disposition of the Common Stock) and, within five (5) Business Days (as
defined below) of being requested by the Company to advise it regarding the
same, certifies to the Company that such Person acquired beneficial
ownership of shares of Common Stock in excess of 14.9% inadvertently or
without knowledge of the terms of the Rights and such certification is
accepted as true by a Requisite Majority (as defined below) acting in good
faith and that, together with all of such Person's Affiliates and
Associates, thereafter does not acquire additional shares of Common Stock
while the Beneficial Owner of 15% or more of the shares of Common Stock
then outstanding; provided, however, that if the Person requested to so
certify fails to do so within five Business Days, then such Person will
become an Acquiring Person immediately after such five Business-Day Period;
and (vii) any Person that becomes an Acquiring Person solely as a result of
a reduction in the number of outstanding shares of Common Stock in a
transaction that is approved by a Requisite Majority, provided that such
Person will immediately be an Acquiring Person in the event such Person
thereafter acquires any additional shares of Common Stock (other than as a
result of a stock split or stock dividend) while the Beneficial Owner of
15% or more of the shares of Common Stock then outstanding.
(b) "ADVERSE PERSON" means a Person (alone or together with any
other Person) as to which the Board of Directors has, after consultation
with such advisors and such other investigation as it considers necessary,
made the following determinations: (i) such Person or Persons any time
after the Rights Dividend Declaration Date have become the Beneficial Owner
of a substantial (but in no event less than 10% of the shares of Common
Stock then outstanding) amount of Common Stock; and (ii) (A) such Person or
Persons intend to cause the Company or its Affiliates to repurchase such
Common Stock beneficially owned by such Person or Persons or to exert
pressure against the Company to take any action or enter into any
transaction or series of transactions with the intent or effect of
providing such Person or Persons with short-term gains or profits under
circumstances in which the Board of Directors of the Company determines
that the long-term interests of the Company and its stockholders would not
be served by taking such action or entering into such transaction or series
of transactions; or (B) beneficial ownership of Common Stock by such Person
or Persons is reasonably likely to have a material adverse effect on the
business, competitive position, prospects, or financial condition of the
Company and its Subsidiaries; provided, however, that Fulton will not be an
Adverse Person under the terms of this Agreement.
(c) "AFFILIATE" and "ASSOCIATE" have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act as in effect on the date of this Agreement.
2
<PAGE>
(d) A Person will be deemed the "BENEFICIAL OWNER" of, and will be
deemed to "BENEFICIALLY OWN," any securities that:
(i) such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement, or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person will not be deemed the
"Beneficial Owner" of, or to "beneficially own," (A) securities
tendered pursuant to a tender or exchange offer made by such Person
or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange, (B)
securities issuable upon exercise of Rights at any time prior to
the occurrence of a Triggering Event, or (C) securities issuable
upon exercise of Rights from and after the occurrence of a
Triggering Event, which Rights were acquired by such Person or any
of such Person's Affiliates or Associates prior to the Distribution
Date or pursuant to SECTION 3(a) or SECTION 22 (the "ORIGINAL
RIGHTS") or pursuant to SECTION 11(i) in connection with an
adjustment made with respect to any Original Rights;
(ii) such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or
dispose of or has "beneficial ownership" of (as determined pursuant
to Rule 13d-3 of the General Rules and Regulations under the
Exchange Act), including pursuant to any agreement, arrangement, or
understanding, whether or not in writing; provided, however, that a
Person will not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this SECTION 1(c)(ii) as a
result of an agreement, arrangement, or understanding to vote such
security if such agreement, arrangement, or understanding: (1)
arises solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in accordance
with, the applicable provisions of the General Rules and
Regulations under the Exchange Act, and (2) is not also then
reportable by such Person on Schedule 13D under the Exchange Act
(or any comparable or successor report); or
(iii) are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate of such Person) with
which such Person (or any of such Person's Affiliates or
Associates) has any agreement, arrangement, or understanding
(whether or not in writing), for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy as described in the
proviso in SECTION 1(c)(ii)), or disposing of any voting securities
of the Company;
3
<PAGE>
provided, however, that nothing in this SECTION 1(c) will cause a Person
engaged in business as an underwriter of securities to be the "Beneficial
Owner" of, or to "beneficially own," any securities acquired through such
Person's participation in good faith in a bona fide firm commitment
underwriting until the expiration of forty days after the date of such
acquisition.
(e) "BUSINESS DAY" means any day other than a Saturday, Sunday, or
a day on which banking institutions in the State of Nevada are authorized
or obligated by law or executive order to close.
(f) "CLOSE OF BUSINESS" on any given date will mean 5:00 p.m., Las
Vegas, Nevada time, on such date; provided, however, that if such date is
not a Business Day it will mean 5:00 p.m., Las Vegas, Nevada time, on the
next succeeding Business Day.
(g) "COMMON STOCK" means the common stock, par value $.01 per
share, of the Company, except that "COMMON STOCK" when used with reference
to any Person other than the Company will mean the capital stock of such
Person with the greatest voting power, or the equity securities or other
equity interest having power to control or direct the management, of such
Person.
(h) "CONTINUING DIRECTOR" means (i) any member of the Board of
Directors of the Company, while such Person is a member of the Board, who
is not an Acquiring Person or Adverse Person, an Affiliate or Associate of
an Acquiring Person or Adverse Person, or a representative or nominee of an
Acquiring Person or Adverse Person or of any such Affiliate or Associate,
and was a member of the Board prior to the date of this Agreement, or (ii)
any Person who subsequently becomes a member of the Board, while such
Person is a member of the Board, who is not an Acquiring Person or Adverse
Person, an Affiliate or Associate of an Acquiring Person or Adverse Person,
or a representative or nominee of an Acquiring Person or Adverse Person or
of any such Affiliate or Associate, if such Person's nomination for
election or election to the Board is recommended or approved by a majority
of the Continuing Directors or a nominating committee of the Board
consisting solely of Continuing Directors.
(i) "PERSON" means any individual, firm, corporation, partnership,
or other public or private entity.
(j) "PREFERRED STOCK" mean shares of Series A Junior Participating
Preferred Stock, par value $20.00 per share, of the Company, and, to the
extent that there are not a sufficient number of shares of Series A Junior
Participating Preferred Stock authorized to permit the full exercise of the
Rights, any other series of Preferred Stock, par value $20.00 per share, of
the Company
4
<PAGE>
designated for such purpose containing terms substantially similar to
the terms of the Series A Junior Participating Preferred Stock.
(k) "REQUISITE MAJORITY" means, at any time, the affirmative vote
of a majority of the Continuing Directors then in office.
(l) "SECTION 11(a)(ii) EVENT" means any event described in SECTION
11(a)(ii) .
(m) "SECTION 13 EVENT" means any event described in clauses (x),
(y), or (z) of SECTION 13(a).
(n) "STOCK ACQUISITION DATE" means the first date of public
announcement (which, for purposes of this definition, will include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange
Act) by the Company or an Acquiring Person that an Acquiring Person has
become an Acquiring Person.
(o) "SUBSIDIARY" means, with reference to any Person, any entity
of which an amount of voting securities sufficient to elect at least a
majority of the directors or similar Persons of such entity is beneficially
owned, directly or indirectly, by such Person, or otherwise controlled by
such Person.
(p) "TRIGGERING EVENT" means any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions of this Agreement, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such Co-Rights Agents as
it may deem necessary or desirable.
Section 3. ISSUE OF RIGHTS CERTIFICATES.
(a) Until the earlier of (i) the Close of Business on the tenth
day after the Stock Acquisition Date (or, if the tenth day after the Stock
Acquisition Date occurs before the Record Date, the Close of Business on
the Record Date) involving an Acquiring Person that has become such in a
transaction as to which a Requisite Majority has not made the determination
specified in SECTION 11(a)(ii)(B); (ii) the Close of Business on the tenth
Business Day (or such later date as the Board determines) after the date
that a tender offer or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company, or any Person or entity
organized, appointed, or established by the Company for or pursuant to the
terms of any such plan) is first published or sent or given
5
<PAGE>
within the meaning of Rule 14d-2(a) of the General Rules and Regulations
under the Exchange Act, if upon consummation thereof, such Person would
be the Beneficial Owner of 15% or more of the shares of Common Stock
then outstanding; or (iii) the Close of Business on the tenth Business
Day after a Person has become an Adverse Person (the earlier of the
times referred to in CLAUSES (i), (ii), and (iii) being referred to as
the "DISTRIBUTION DATE"), (x) the Rights will be evidenced (subject to
the provisions of this SECTION 3(b)) by the certificates for the Common
Stock registered in the names of the holders of the Common Stock (which
certificates for Common Stock will be deemed also to be certificates for
Rights) and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying
shares of Common Stock (including a transfer to the Company). As soon as
practicable after the Distribution Date, the Rights Agent will send by
first-class, insured, postage prepaid mail, to each record holder of the
Common Stock as of the Distribution Date, at the address of such holder
shown on the records of the Company, one or more rights certificates, in
substantially the form of EXHIBIT B (the "RIGHTS CERTIFICATES"),
evidencing one Right for each share of Common Stock so held, subject to
adjustment as provided in this Agreement. In the event that an
adjustment in the number of Rights per share of Common Stock has been
made pursuant to SECTION 11(p), at the time of distribution of the
Rights Certificates, the Company will make the necessary and appropriate
rounding adjustments (in accordance with SECTION 14(a)) so that Rights
Certificates representing only whole numbers of Rights are distributed
and cash is paid in lieu of any fractional Rights. As of and after the
Distribution Date, the Rights will be evidenced solely by such Rights
Certificates.
(b) As promptly as practicable following the Record Date, the
Company will send a copy of a Summary of Rights, in substantially the form
of EXHIBIT C, by first-class, postage prepaid mail, to each record holder
of the Common Stock as of the Close of Business on the Record Date, at the
address of such holder shown on the records of the Company. With respect
to certificates for the Common Stock outstanding as of the Record Date,
until the Distribution Date, the Rights will be evidenced by such
certificates for the Common Stock and the registered holders of the Common
Stock will also be the registered holders of the associated Rights. Until
the earlier of the Distribution Date or the Expiration Date (as defined in
SECTION 7), the transfer of any certificates representing shares of Common
Stock in respect of which Rights have been issued will also constitute the
transfer of the Rights associated with such shares of Common Stock.
(c) Rights will be issued in respect of all shares of Common Stock
that are issued (whether originally issued or from the Company's treasury)
after the Record Date but prior to the earlier of the Distribution Date or
the Expiration Date. Certificates representing such shares of Common Stock
will also be deemed to be certificates for Rights, and will bear the
following legend:
6
<PAGE>
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER TO
CERTAIN RIGHTS AS SET FORTH IN THE RIGHTS AGREEMENT BETWEEN
ANCHOR GAMING (THE "COMPANY") AND THE CHASE MANHATTAN BANK (THE
"RIGHTS AGENT") DATED AS OF OCTOBER 17, 1997 (AS AMENDED FROM
TIME TO TIME, THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE
HEREBY INCORPORATED IN THIS CERTIFICATE BY REFERENCE AND A COPY
OF WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY.
UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS
AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES
AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE COMPANY
WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS
AGREEMENT, AS IN EFFECT ON THE DATE OF MAILING, WITHOUT CHARGE
PROMPTLY AFTER RECEIPT OF A WRITTEN REQUEST. UNDER CERTAIN
CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY ANY PERSON WHO IS, WAS, OR BECOMES AN
ACQUIRING PERSON OR AN ADVERSE PERSON OR ANY AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON OR AN ADVERSE PERSON (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY
HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER,
MAY BECOME NULL AND VOID.
With respect to such certificates containing the foregoing legend,
until the earlier of (i) the Distribution Date or (ii) the Expiration Date,
the Rights associated with the Common Stock represented by such
certificates will be evidenced by such certificates alone and registered
holders of Common Stock will also be the registered holders of the
associated Rights, and the transfer of any of such certificates will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificates.
Section 4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (and the forms of election to purchase
and of assignment to be printed on the reverse of the rights certificates)
will each be substantially in the form set forth in EXHIBIT B and may have
such marks of identification or designation and such legends, summaries, or
endorsements as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required
to comply with any applicable law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange or
quotation system on which the Rights may from time to time be listed, or to
conform to usage. Subject to the provisions of SECTION 11 and SECTION 22,
the Rights Certificates, whenever distributed, will be dated as of the
Record Date and on their face will entitle the holders of such Rights
Certificates to purchase such number of one one-thousandths of a share
7
<PAGE>
of Preferred Stock as is set forth in such Rights Certificates at the
price set forth in such Rights Certificates (such exercise price per one
one-thousandth of a share, the "PURCHASE PRICE"), but the amount and
type of securities purchasable upon the exercise of each Right and the
Purchase Price will be subject to adjustment as provided in this
Agreement.
(b) Any Rights Certificate issued pursuant to SECTION 3(a) or
SECTION 22 that represents Rights beneficially owned by (i) an Acquiring
Person or an Adverse Person or any Associate or Affiliate of an Acquiring
Person or an Adverse Person, (ii) a transferee from an Acquiring Person or
an Adverse Person (or from any Associate or Affiliate of an Acquiring
Person or an Adverse Person) that becomes a transferee after the Acquiring
Person or an Adverse Person becomes an Acquiring Person or an Adverse
Person, or (iii) a transferee from an Acquiring Person or an Adverse Person
(or of any Associate or Affiliate of an Acquiring Person or an Adverse
Person) that becomes a transferee prior to or concurrently with the
Acquiring Person or an Adverse Person becoming an Acquiring Person or an
Adverse Person and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person or Adverse
Person to holders of equity interests in such Acquiring Person or Adverse
Person or to any Person with whom such Acquiring Person or Adverse Person
has any continuing agreement, arrangement, or understanding regarding the
transferred Rights or (B) a transfer that the Board of Directors of the
Company has determined is part of an agreement, plan, arrangement, or
understanding that has as a substantial purpose or effect avoidance of
SECTION 7(e), and any Rights Certificate issued pursuant to SECTION 6 or
SECTION 11 upon transfer, exchange, replacement, or adjustment of any other
Rights Certificate referred to in this SECTION 4(b), will contain (to the
extent feasible) the following legend:
THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO IS, WAS, OR BECAME AN
ACQUIRING PERSON OR AN ADVERSE PERSON OR AN AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON OR AN ADVERSE PERSON (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS
RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME
NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SUCH AGREEMENT.
Section 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates will be executed on behalf of the
Company by its Chairman of the Board, its Chief Executive Officer, its
Chief Operating Officer, its President, or any Vice President, either
manually or by facsimile signature; will have affixed thereto the Company's
seal or a facsimile thereof; and will be attested by the Secretary or an
Assistant Secretary of the Company,
8
<PAGE>
either manually or by facsimile signature. The Rights Certificates will
be countersigned by the Rights Agent, either manually or by facsimile
signature and will not be valid for any purpose unless so countersigned.
In case any officer of the Company who has signed any of the Rights
Certificates ceases to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the
Company, such Rights Certificates, nevertheless, may be countersigned by
the Rights Agent and issued and delivered by the Company with the same
force and effect as though the Person who signed such Rights
Certificates had not ceased to be such officer of the Company, and any
Rights Certificate may be signed on behalf of the Company by any Person
who, at the actual date of the execution of such Rights Certificate, is
a proper officer of the Company to sign such Rights Certificate,
although at the date of the execution of such Rights Certificate any
such Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates
issued under this Agreement. Such books will show the names and addresses
of the respective holders of the Rights Certificates, the number of Rights
evidenced on the face of the Rights Certificates, and the date of each of
the Rights Certificates.
Section 6. TRANSFER, SPLIT UP, COMBINATION, AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST, OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to the provisions of SECTION 4(b), SECTION 7(e), and
SECTION 14, at any time after the Distribution Date, and at or prior to the
Expiration Date, any Rights Certificate or Certificates may be transferred,
split up, combined, or exchanged for another Rights Certificate or Rights
Certificates, entitling the registered holder to purchase a like number of
one one-thousandths of a share of Preferred Stock (or, following a
Triggering Event, Common Stock, other securities, cash, or other property,
as the case may be) as the Rights Certificate or Rights Certificates
surrendered then entitled such holder (or former holder in the case of a
transfer) to purchase. Any registered holder desiring to transfer, split
up, combine, or exchange any Rights Certificate or Rights Certificates will
make such request in writing delivered to the Rights Agent, and will
surrender the Rights Certificate or Rights Certificates to be transferred,
split up, combined, or exchanged at the principal office or offices of the
Rights Agent designated for such purpose. Neither the Rights Agent nor the
Company will be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered
holder has completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and has provided
such additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company
requests in good faith. Thereupon, the Rights Agent will,
9
<PAGE>
subject to SECTION 4(b), SECTION 7(e), and SECTION 14, countersign and
deliver to the Person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any transfer, split up,
combination, or exchange of any Rights Certificate.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction, or
mutilation of a Rights Certificate, and, in case of loss, theft, or
destruction, of indemnity or security satisfactory to them, and
reimbursement to the Company and the Rights Agent of all reasonable
expenses incidental thereto, and upon surrender to the Rights Agent and
cancellation of the Rights Certificate if mutilated, the Company will
execute and deliver a new Rights Certificate of like tenor to the Rights
Agent for countersignature and delivery to the registered owner in lieu of
the Rights Certificate so lost, stolen, destroyed, or mutilated.
Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS.
(a) Subject to SECTION 7(e), the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as
otherwise provided in this Agreement including, without limitation, the
restrictions on exercisability set forth in SECTION 9(c), SECTION
11(a)(iii), and SECTION 23(a)) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the
form of election to purchase and the certificate on the reverse side of
the Rights Certificate duly executed, to the Rights Agent at the
principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with
respect to the total number of one one-thousandths of a share (or other
securities, cash, or other property, as the case may be) as to which
such surrendered Rights are then exercisable, at or prior to the earlier
of (i) the Close of Business on October 20, 2007, (the "FINAL EXPIRATION
DATE"), or (ii) the time at which the Rights are redeemed as provided in
SECTION 23 (the earlier of the times referred to in CLAUSES (i) and
(ii) being referred to as the "EXPIRATION DATE")).
(b) The Purchase Price for each one one-thousandth of a share of
Preferred Stock pursuant to the exercise of a Right will initially be
$400.00; will be subject to adjustment from time to time as provided in
SECTION 11, and SECTION 13(a); and will be payable in accordance with
SECTION 7(c).
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly
executed, accompanied by payment, with respect to each Right so
exercised, of the Purchase Price per one one-thousandth of a share of
Preferred Stock (or other shares, securities, cash, or other property,
as the case may be) to be purchased
10
<PAGE>
as set forth below and an amount equal to any applicable transfer tax,
the Rights Agent will, subject to SECTION 20(k), promptly (i) (A)
requisition from any transfer agent of the shares of Preferred Stock (or
make available, if the Rights Agent is the transfer agent for such
shares) certificates for the total number of one one-thousandths of a
share of Preferred Stock to be purchased, (the Company hereby
irrevocably authorizing its transfer agent to comply with all such
requests), or (B) if the Company has elected to deposit the total number
of shares of Preferred Stock issuable upon exercise of the Rights with a
depository agent, requisition from the depository agent depository
receipts representing such number of one one-thousandths of a share of
Preferred Stock as are to be purchased (in which case certificates for
the shares of Preferred Stock represented by such receipts will be
deposited by the transfer agent with the depository agent) and the
Company will direct the depository agent to comply with such request;
(ii) requisition from the Company the amount of cash, if any, to be paid
in lieu of fractional shares in accordance with SECTION 14; (iii) after
receipt of such certificates or depository receipts, cause such
certificates or depository receipts to be delivered to or upon the order
of the registered holder of such Rights Certificate, registered in such
name or names as may be designated by such holder; and (iv) after
receipt thereof, deliver such cash, if any, to or upon the order of the
registered holder of such Rights Certificate. The payment of the
Purchase Price (as such amount may be reduced pursuant to SECTION
11(a)(iii)) will be made in cash or by certified bank check or bank
draft payable to the order of the Company. In the event that the Company
is obligated to issue other securities (including Common Stock) of the
Company, pay cash, or distribute other property pursuant to SECTION
11(a), the Company will make all arrangements necessary so that such
other securities, cash, or other property are available for distribution
by the Rights Agent, if and when appropriate. The Company reserves the
right to require prior to the occurrence of a Triggering Event that,
upon any exercise of Rights, a number of Rights be exercised so that
only whole shares of Preferred Stock would be issued.
(d) In case the registered holder of any Rights Certificate
exercises less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining
unexercised will be issued by the Rights Agent and delivered to, or upon
the order of, the registered holder of such Rights Certificate, registered
in such name or names as may be designated by such holder, subject to the
provisions of SECTION 14.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by any Person referred to in CLAUSES (i)
through (iii) below will become null and void without any further
action, and no holder of such Rights will have any rights whatsoever
with respect to such Rights, whether under any provision of this
Agreement or otherwise: (i) an Acquiring Person or an Adverse Person or
an Associate or Affiliate of an Acquiring Person or an Adverse Person,
(ii) a
11
<PAGE>
transferee from an Acquiring Person or an Adverse Person (or from any
Associate or Affiliate of an Acquiring Person or Adverse Person) that
becomes a transferee after the Acquiring Person or an Adverse Person
becomes such, or (iii) a transferee from an Acquiring Person or an
Adverse Person (or of any such Associate or Affiliate) that becomes a
transferee prior to or concurrently with the Acquiring Person or Adverse
Person becoming such and that receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring
Person or the Adverse Person to holders of equity interests in such
Acquiring Person or Adverse Person or to any Person with whom the
Acquiring Person or Adverse Person has any continuing agreement,
arrangement, or understanding regarding the transferred Rights or (B) a
transfer that the Board of Directors of the Company has determined is
part of an agreement, plan, arrangement, or understanding that has as a
substantial purpose or effect the avoidance of this SECTION 7(e). The
Company will use reasonable efforts to insure that the provisions of
this SECTION 7(e) and SECTION 4(b) are complied with, but will have no
liability under this Agreement to any holder of Rights Certificates or
other Person as a result of its failure to make any determinations with
respect to an Acquiring Person, an Adverse Person, or any of their
Affiliates, Associates, or transferees.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company will be obligated to undertake any
action with respect to a registered holder upon the occurrence of any
purported exercise as set forth in this SECTION 7 unless such registered
holder has (i) completed and signed the certificate contained in the form
of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company
requests in good faith.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange will, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, will be cancelled by it, and no Rights
Certificates will be issued in lieu thereof except as expressly permitted by any
of the provisions of this Agreement. The Company will deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent will so cancel and
retire, any other Rights Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent will deliver all
cancelled Rights Certificates to the Company, or will, at the written request of
the Company, destroy such cancelled Rights Certificates, and in such case will
deliver a certificate of destruction to the Company.
12
<PAGE>
Section 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event,
out of its authorized and unissued shares of Common Stock or other
securities or out of its authorized and issued shares held in its
treasury), the number of shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock or other securities) that
(as provided in this Agreement including, without limitation, SECTION
11(a)(iii)), will be sufficient to permit the exercise in full of all
outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock or other securities)
issuable and deliverable upon the exercise of the Rights may be listed on
any national securities exchange or automated quotation system, the Company
will use its reasonable efforts to cause, from and after such time as the
Rights become exercisable, all shares reserved for such issuance to be
listed on such exchange or automated quotation system upon official notice
of issuance upon such exercise.
(c) The Company will use its best reasonable efforts to (i) file,
as soon as practicable following the earliest date after the first
occurrence of a Section 11(a)(ii) Event on which the consideration to be
delivered by the Company upon exercise of the Rights has been determined
in accordance with SECTION 11(a)(iii), a registration statement under
the Securities Act of 1933, as amended (the "ACT"), with respect to the
securities purchasable upon exercise of the Rights on an appropriate
form, (ii) cause such registration statement to become effective as soon
as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting
the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B)
the date of the expiration of the Rights. The Company will also take
such action as may be appropriate under, or to ensure compliance with,
the securities or "blue sky" laws of the various states in connection
with the exercisability of the Rights. The Company may temporarily
suspend, for a period of time not to exceed ninety (90) days after the
date set forth in clause (i) of the first sentence of this SECTION 9(c),
the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon any such
suspension, the Company will issue a public announcement stating that
the exercisability of the Rights has been temporarily suspended, as well
as a public announcement at such time as the suspension is no longer in
effect. In addition, if the Company determines that a registration
statement is required following the Distribution Date, the Company may
temporarily suspend the exercisability of the Rights until such time as
a registration statement has been declared effective.
13
<PAGE>
Notwithstanding any provision of this Agreement to the contrary, the
Rights will not be exercisable in any jurisdiction if the requisite
qualification in such jurisdiction has not been obtained, the exercise
of such Rights is not permitted under applicable law, or a registration
statement has not been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all shares of Preferred Stock
(and, following the occurrence of a Triggering Event, Common Stock or other
securities) delivered upon exercise of Rights will, at the time of delivery
of the certificates for such shares (subject to payment of the Purchase
Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges
that may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of one one-thousandths of
a share of Preferred Stock (or Common Stock or other securities, as the
case may be) upon the exercise of Rights. The Company will not, however, be
required to pay any transfer tax that may be payable in respect of any
transfer or delivery of Rights Certificates to a Person other than, or the
issuance or delivery of a number of one one-thousandths of a share of
Preferred Stock (or Common Stock or other securities, as the case may be)
in respect of a name other than that of, the registered holder of the
Rights Certificates evidencing Rights surrendered for exercise or to issue
or deliver any certificates for a number of one one-thousandths of a share
of Preferred Stock (or Common Stock or other securities, as the case may
be) in a name other than that of the registered holder upon the exercise of
any Rights until such tax has been paid (any such tax being payable by the
holder of such Rights Certificate at the time of surrender) or until it has
been established to the Company's satisfaction that no such tax is due.
Section 10. PREFERRED STOCK RECORD DATE. Each Person in whose name any
certificate for a number of one one-thousandths of a share of Preferred Stock
(or Common Stock or other securities, as the case may be) is issued upon the
exercise of Rights will for all purposes be deemed to have become the holder of
record of such fractional shares of Preferred Stock (or Common Stock or other
securities, as the case may be) represented thereby on, and such certificate
will be dated, the date upon which the Rights Certificate evidencing such Rights
was duly surrendered and payment of the Purchase Price (and all applicable
transfer taxes) was made; provided, however, that if the date of such surrender
and payment is a date upon which the Preferred Stock (or Common Stock or other
securities, as the case may be) transfer books of the Company are closed, such
Person will be deemed to have become the record holder of such shares
(fractional or otherwise) on, and such certificate will be dated, the next
succeeding Business Day on which the Preferred Stock (or Common Stock or other
securities, as the case may be) transfer books of the Company are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Rights Certificate
will not be
15
<PAGE>
entitled to any rights of a stockholder of the Company with respect to
shares for which the Rights is exercisable, including, without
limitation, the right to vote, to receive dividends or other
distributions, or to exercise any preemptive rights, and will not be
entitled to receive any notice of any proceedings of the Company, except
as provided in this Agreement.
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES, OR
NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares covered
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this SECTION 11.
(a) (i) In the event the Company at any time after the date of
this Agreement (A) declares a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivides the
outstanding Preferred Stock, (C) combines the outstanding Preferred
Stock into a smaller number of shares, or (D) issues any shares of
its capital stock in a reclassification of the Preferred Stock
(including, without limitation, any such reclassification in
connection with a consolidation or merger in which the Company is
the continuing or surviving corporation), except as otherwise
provided in this SECTION 11(a) and SECTION 7(e), the Purchase Price
in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination, or
reclassification, and the number and kind of shares of Preferred
Stock or capital stock, as the case may be, issuable on such date,
will be proportionately adjusted so that the holder of any Right
exercised after such time will be entitled to receive, upon payment
of the Purchase Price then in effect, the aggregate number and kind
of shares of Preferred Stock or capital stock, as the case may be,
that, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Stock transfer books of the
Company were open, such holder would have owned upon such exercise
and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. If an event occurs
that would require an adjustment under both this SECTION 11(a)(i)
and SECTION 11(a)(ii), the adjustment provided for in this SECTION
11(a)(i) will be in addition to, and will be made prior to, any
adjustment required pursuant to SECTION 11(a)(ii).
(ii) In the event that:
(A) Any Acquiring Person or Adverse Person or any
Associate or Affiliate of any Acquiring Person or Adverse
Person, at any time after the Stock Acquisition Date, directly
or indirectly, (1) merges from, with, or into the Company or
otherwise combines with the Company and the Company is the
continuing or surviving Person of such merger or combination
and the Common Shares of the Company or other equity
securities of the Company remain
15
<PAGE>
outstanding, (2) in one transaction or a series of
transactions, transfers any assets to the Company or to any of
the Company's Subsidiaries in exchange (in whole or in part)
for Common Stock, for shares of other equity securities of the
Company, or for securities exercisable for or convertible into
shares of equity securities of the Company (Common Stock or
otherwise) or otherwise obtains from the Company, with or
without consideration, any additional shares of such equity
securities or securities exercisable for or convertible into
shares of such equity securities (other than pursuant to a pro
rata distribution to all holders of Common Shares), (3) sells,
purchases, leases, exchanges, mortgages, pledges, transfers,
or otherwise acquires or disposes of assets in one transaction
or a series of transactions, to, from, or with (as the case
may be) the Company or any of the Company's Subsidiaries, on
terms or conditions less favorable in any respect than the
Company or such Subsidiary would be able to obtain in
arm's-length negotiation with an unaffiliated third party,
other than pursuant to a Section 13 Event, (4) sells,
purchases, leases, exchanges, mortgages, pledges, transfers,
or otherwise acquires or disposes of assets having an
aggregate fair market value of more than $3,000,000 in one
transaction or a series of transactions to, from, or with (as
the case may be) the Company or any of the Company's
Subsidiaries (other than incidental to the lines of business,
if any, engaged in as of the date of this Agreement between
the Company or such Subsidiary, on the one hand, and such
Acquiring Person or Adverse Person or such Associate or
Affiliate, on the other), other than pursuant to a Section 13
Event, (5) receives any compensation from the Company or any
of the Company's Subsidiaries other than compensation for
full-time employment as a regular employee at rates in
accordance with the Company's (or such Subsidiaries') past
practices, or (6) receives the benefits, directly or
indirectly (except proportionately as a stockholder and as a
result of any requirement of law or governmental regulation),
of any loans, advances, guarantees, pledges, or other
financial assistance or any tax credits or other tax advantage
provided by the Company or any of the Company's Subsidiaries;
(B) any Person, alone or together with its
Affiliates or Associates, at any time after the Rights
Dividend Declaration Date, becomes an Acquiring Person, unless
the event causing such Person to become an Acquiring Person is
a Section 13 Event, or is an acquisition of shares of Common
Stock pursuant to a tender offer or an exchange offer for all
outstanding shares of Common Stock at a price and on terms
determined by a Requisite Majority,
16
<PAGE>
after receiving advice from one or more nationally recognized
investment banking firms selected by such Requisite Majority,
to be (1) fair to all stockholders, after taking into
consideration all factors that such Requisite Majority deems
relevant, including, without limitation, the long-term
prospects and value of the Company and the prices and terms
that such Requisite Majority believes, in good faith, could
reasonably be achieved if the Company or its assets were sold
on an orderly basis designed to realize maximum value; and (2)
otherwise in the best interests of the Company and its
stockholders;
(C) during such time as there is an Acquiring Person
or Adverse Person, there is any reclassification of securities
(including any reverse stock split), recapitalization of the
Company, or any merger or consolidation of the Company into,
from, or with any of its Subsidiaries or any other transaction
or series of transactions involving the Company or any of its
Subsidiaries, other than a Section 13 Event, or series of such
events (whether or not with or into or otherwise involving and
Acquiring Person or Adverse Person) that has the effect,
directly or indirectly, of increasing by more than 1% the
proportionate share of the outstanding shares of any class of
equity securities (or securities convertible into such equity
securities) of the Company or any of its Subsidiaries that is
directly or indirectly beneficially owned by an Acquiring
Person or Adverse Person or any Associate or Affiliate of any
Acquiring Person or Adverse Person; or
(D) the Board of Directors of the Company declares
any Person to be an Adverse Person;
then, promptly following the first occurrence of a Section 11(a)(ii)
Event, proper provision will be made so that each holder of a Right
(except as provided below in this SECTION 11(a)(ii) and in SECTION 7(e))
will thereafter have the right to receive, upon exercise of such Right
at the then current Purchase Price in accordance with the terms of this
Agreement, in lieu of a number of one one-thousandths of a share of
Preferred Stock, such number of shares of Common Stock of the Company as
equals the result obtained by (x) multiplying the then current Purchase
Price by the then number of one one-thousandths of a share of Preferred
Stock for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, and (y) dividing that product
(which, following such first occurrence, will thereafter be referred to
as the "PURCHASE PRICE" for each Right and for all purposes of this
Agreement) by 50% of the Current Market Price (determined pursuant to
SECTION 11(d)) per share of Common Stock on the date of such first
occurrence (such number of shares, the "ADJUSTMENT SHARES").
17
<PAGE>
(iii) In the event that the number of shares of Common Stock
that are authorized by the Company's articles of incorporation
but not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights is not sufficient to
permit the exercise in full of the Rights in accordance with
SECTION 11(a)(ii), the Company will (A) determine the value of
the Adjustment Shares issuable upon the exercise of a Right
(the "CURRENT VALUE"), and (B) with respect to each Right
(subject to SECTION 7(e)), make adequate provision to
substitute for the Adjustment Shares, upon the exercise of a
Right and payment of the applicable Purchase Price, (1) cash,
(2) a reduction in the Purchase Price, (3) Common Stock or
other equity securities of the Company (including, without
limitation, shares, or units of shares, of preferred stock,
such as the Preferred Stock, that a Requisite Majority has
deemed to have essentially the same value or economic rights
as shares of Common Stock (such securities being referred to
as "COMMON STOCK EQUIVALENTS")), (4) debt securities of the
Company, (5) other assets or property, or (6) any combination
of the foregoing, having an aggregate value equal to the
Current Value (less the amount of any reduction in the
Purchase Price), where such aggregate value has been
conclusively determined by a Requisite Majority based upon the
advice of a nationally recognized investment banking firm
selected by a Requisite Majority; provided, however, that if
the Company has not made adequate provision to deliver value
pursuant to CLAUSE (B) above within thirty (30) days following
the later of (x) the first occurrence of a Section 11(a)(ii)
Event and (y) the date on which the Company's right of
redemption pursuant to SECTION 23(a) expires (the later of (x)
and (y) being referred to as the "SECTION 11(a)(ii) TRIGGER
DATE"), then the Company will be obligated to deliver, upon
the surrender for exercise of a Right and without requiring
payment of the Purchase Price, shares of Common Stock (to the
extent available) and then, if necessary, cash, which shares
or cash have an aggregate value equal to the Spread. For
purposes of the preceding sentence, the term "SPREAD" means
the excess of (i) the Current Value over (ii) the Purchase
Price. If the Board determines in good faith that it is likely
that sufficient additional shares of Common Stock could be
authorized for issuance upon exercise in full of the Rights,
the thirty (30) day period set forth above may be extended to
the extent necessary, but not more than ninety (90) days after
the Section 11(a)(ii) Trigger Date, in order that the Company
may seek shareholder approval for the authorization of such
additional shares (such thirty (30) day period, as it may be
extended, being the "SUBSTITUTION PERIOD"). To the extent that
action is to be taken pursuant to the first or third sentences
of this SECTION 11(a)(iii), the Company (1) will provide,
subject to SECTION 7(e), that such action will apply uniformly
to all outstanding Rights, and (2) may suspend the
exercisability of the Rights until the expiration of the
Substitution Period in
18
<PAGE>
order to seek such shareholder approval for such authorization
of additional shares or to determine the appropriate form of
distribution to be made pursuant to such first sentence and to
determine the value of such distribution. In the event of any
such suspension, the Company will issue a public announcement
stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at
such time as the suspension is no longer in effect. For
purposes of this SECTION 11(a)(iii), the value of each
Adjustment Share will be the Current Market Price per share of
the Common Stock on the Section 11(a)(ii) Trigger Date and the
per share or per unit value of any Common Stock Equivalent
will be deemed to equal the Current Market Price per share of
the Common Stock on such date.
(b) In case the Company fixes a record date for the
issuance of rights, options, or warrants to all holders of
Preferred Stock entitling them to subscribe for or purchase (for a
period expiring within forty-five (45) calendar days after such
record date) Preferred Stock (or securities having the same rights,
privileges, and preferences as the shares of Preferred Stock
("EQUIVALENT PREFERRED STOCK")) or securities convertible into
Preferred Stock or Equivalent Preferred Stock at a price per share
of Preferred Stock or per share of Equivalent Preferred Stock (or
having a conversion price per share, if a security convertible into
Preferred Stock or Equivalent Preferred Stock) less than the
Current Market Price (as determined pursuant to SECTION 11(d)) per
share of Preferred Stock on such record date, the Purchase Price to
be in effect after such record date will be determined by
multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which is the number of
shares of Preferred Stock outstanding on such record date, plus the
number of shares of Preferred Stock that the aggregate offering
price of the total number of shares of Preferred Stock or
Equivalent Preferred Stock so to be offered (or the aggregate
initial conversion price of the convertible securities so to be
offered) would purchase at such Current Market Price, and the
denominator of which is the number of shares of Preferred Stock
outstanding on such record date, plus the number of additional
shares of Preferred Stock or Equivalent Preferred Stock to be
offered for subscription or purchase (or into the maximum number of
shares into which the convertible securities so to be offered are
initially convertible). In the event that the number of shares of
Preferred Stock or Equivalent Preferred Stock issuable under the
terms of a convertible security, or the conversion or exercise
price of such convertible security, changes after the initial
issuance of such convertible security, an adjustment will be made
to the Purchase Price that conforms with the adjustment set forth
in this SECTION 11(b). In case such subscription price may be paid
by delivery of consideration part or all of which may be in a form
other than cash, the value of such consideration will be as
conclusively determined in good faith by a Requisite Majority,
whose determination will be described in a statement filed with the
Rights Agent and will be binding on the Rights Agent and the
holders of
19
<PAGE>
the Rights. Shares of Preferred Stock owned by or held for the
account of the Company will be deemed not to be outstanding for the
purpose of any such computation. Such adjustment will be made
successively whenever such a record date is fixed, and in the event
that such rights, options, or warrants are not so issued, the
Purchase Price will be adjusted to be the Purchase Price that would
then be in effect if such record date had not been fixed.
(c) In case the Company fixes a record date for a distribution
to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of
indebtedness, cash (other than a regular quarterly cash dividend
out of the earnings or retained earnings of the Company), assets
(other than a dividend payable in Preferred Stock, but including
any dividend payable in stock other than Preferred Stock) or
subscription rights or warrants (excluding those referred to in
SECTION 11(b)), the Purchase Price to be in effect after such
record date will be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the
numerator of which is the Current Market Price (as determined
pursuant to SECTION 11(d)) per share of Preferred Stock on such
record date, less the fair market value (as conclusively determined
in good faith by a Requisite Majority, whose determination will be
described in a statement filed with the Rights Agent) of the
portion of the cash, assets, or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable
to a share of Preferred Stock and the denominator of which is such
Current Market Price (as determined pursuant to SECTION 11(d)) per
share of Preferred Stock). Such adjustments will be made
successively whenever such a record date is fixed, and in the event
that such distribution is not so made, the Purchase Price will be
adjusted to be the Purchase Price that would have been in effect if
such record date had not been fixed.
(d) (i) For the purpose of any computation under this
Agreement, other than computations made pursuant to SECTION
11(a)(iii), the "CURRENT MARKET PRICE" per share of Common
Stock on any date will be deemed to be the average of the
daily closing prices per share of such Common Stock for the
thirty (30) consecutive Trading Days (as defined below)
immediately prior to such date, and for purposes of
computations made pursuant to SECTION 11(a)(iii), the "CURRENT
MARKET PRICE" per share of Common Stock on any date will be
deemed to be the average of the daily closing prices per share
of such Common Stock for the ten (10) consecutive Trading Days
immediately following such date; provided, however, that in
the event that the Current Market Price per share of the
Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (A) a
dividend or distribution on such Common Stock payable in
shares of such Common Stock or securities convertible into
shares of such Common Stock (other than the
20
<PAGE>
Rights), or (B) any subdivision, combination, or
reclassification of such Common Stock, and the ex-dividend
date for such dividend or distribution, or the record date for
such subdivision, combination, or reclassification has not
occurred prior to the commencement of the requisite thirty
(30) Trading Day or ten (10) Trading Day period, as set forth
above, then, and in each such case, the Current Market Price
will be properly adjusted to take into account ex-dividend
trading. The closing price for each day will be the last sale
price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock
Exchange or, if the shares of Common Stock are not listed or
admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal
national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if the shares of
Common Stock are not listed or admitted to trading on any
national securities exchange, the last quoted price or, if not
so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by NASDAQ or such
other system then in use, or, if on any such date the shares
of Common Stock are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock
selected by a Requisite Majority. If on any such date no
market maker is making a market in the Common Stock, the fair
value of such shares on such date as determined in good faith
by a Requisite Majority will be used. The term "TRADING DAY"
means a day on which the principal national securities
exchange on which the shares of Common Stock are listed or
admitted to trading is open for the transaction of business
or, if the shares of Common Stock are not listed or admitted
to trading on any national securities exchange, a Business
Day. If the Common Stock is not publicly held or not so listed
or traded, Current Market Price per share will mean the fair
value per share as determined in good faith by a Requisite
Majority, the determination of which will be described in a
statement filed with the Rights Agent and will be conclusive
for all purposes.
(ii) For the purpose of any computation under this
Agreement, the "CURRENT MARKET PRICE" per share of Preferred
Stock will be determined in the same manner as set forth above
for the Common Stock in SECTION 11(d)(i) (other than the last
sentence thereof). If the Current Market Price per share of
Preferred Stock cannot be determined in the manner provided
above or if the Preferred Stock is not publicly held or listed
or traded in a manner described in SECTION 11(d)(i), the
Current Market Price per share of Preferred Stock will be
conclusively deemed to be an amount equal to one thousand
(1,000) (as such number may be
21
<PAGE>
appropriately adjusted for such events as stock splits, stock
dividends, and recapitalizations with respect to the Common
Stock occurring after the date of this Agreement) multiplied
by the Current Market Price per share of the Common Stock. If
neither the Common Stock nor the Preferred Stock is publicly
held or so listed or traded, Current Market Price per share of
the Preferred Stock will mean the fair value per share as
determined in good faith by a Requisite Majority, whose
determination will be described in a statement filed with the
Rights Agent and will be conclusive for all purposes. For all
purposes of this Agreement, the Current Market Price of one
one-thousandth of a share of Preferred Stock will be equal to
the Current Market Price of one share of Preferred Stock
divided by one thousand (1,000).
(e) Anything in this Agreement to the contrary
notwithstanding, no adjustment in the Purchase Price will be
required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments that by reason of this
SECTION 11(e) are not required to be made will be carried forward
and taken into account in any subsequent adjustment. All
calculations under this SECTION 11 will be made to the nearest cent
or to the nearest ten-thousandth of a share of Common Stock or
other share or one-millionth of a share of Preferred Stock, as the
case may be. Notwithstanding the first sentence of this SECTION
11(e), any adjustment required by this SECTION 11 will be made no
later than the earlier of (i) three (3) years from the date of the
transaction that mandates such adjustment or (ii) the Expiration
Date.
(f) If, as a result of an adjustment made pursuant to
SECTION 11(a)(ii) or SECTION 13(a), the holder of any Right
thereafter exercised becomes entitled to receive any shares of
capital stock other than Preferred Stock, then the number of such
other shares so receivable upon exercise of any Right and the
Purchase Price will be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in
SECTIONS 11(a), (b), (c), (e), (g), (h), (i), (j), (k), (m), and
(q) and the provisions of SECTIONS 7, 9, 10, 13, and 14 with
respect to the Preferred Stock will apply on like terms to any such
other shares.
(g) All Rights originally issued by the Company subsequent
to any adjustment made to the Purchase Price under this Agreement
will evidence the right to purchase, at the adjusted Purchase
Price, the number of one one-thousandths of a share of Preferred
Stock purchasable from time to time under this Agreement upon
exercise of the Rights, all subject to further adjustment as
provided in this Agreement.
(h) Unless the Company has exercised its election as
provided in SECTION 11(i), upon each adjustment of the Purchase
Price as a result of the
22
<PAGE>
calculations made in SECTIONS 11(b) and (c), each Right outstanding
immediately prior to the making of such adjustment will thereafter
evidence the right to purchase, at the adjusted Purchase Price,
that number of one one-thousandths of a share of Preferred Stock
(calculated to the nearest one-millionth) obtained by (i)
multiplying (x) the number of one one-thousandths of a share
covered by a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of
the Purchase Price, and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in
lieu of any adjustment in the number of one one-thousandths of a
share of Preferred Stock purchasable upon the exercise of a Right.
Each of the Rights outstanding after such an adjustment in the
number of Rights will be exercisable for the number of one
one-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held
of record prior to such adjustment of the number of Rights will
become that number of Rights (calculated to the nearest one
ten-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the
Purchase Price. The Company will make a public announcement of its
election to adjust the number of Rights, indicating the record date
for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the
Rights Certificates have been issued, will be at least ten (10)
days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number
of Rights pursuant to this SECTION 11(i), the Company will, as
promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights
Certificates evidencing, subject to SECTION 14, the additional
Rights to which such holders are entitled as a result of such
adjustment, or, at the option of the Company, will cause to be
distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior
to the date of adjustment, and upon surrender thereof, if required
by the Company, new Rights Certificates evidencing all the Rights
to which such holders are entitled after such adjustment. Rights
Certificates so to be distributed will be issued, executed, and
countersigned in the manner provided for in this Agreement (and may
bear, at the option of the Company, the adjusted Purchase Price)
and will be registered in the names of the holders of record of
Rights Certificates on the record date specified in the public
announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of one one-thousandths of a share of
Preferred Stock issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter
23
<PAGE>
issued may continue to express the Purchase Price per one
one-thousandth of a share and the number of one one-thousandths of
a share that were expressed in the initial Rights Certificates
issued under this Agreement.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then stated value, if any, of
the number of one one-thousandths of a share of Preferred Stock
issuable upon exercise of the Rights, the Company will take any
corporate action that may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue
such number of fully paid and nonassessable one one-thousandths of
a share of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this SECTION 11 requires that an
adjustment in the Purchase Price be made effective as of a record
date for a specified event, the Company may elect to defer until
the occurrence of such event the issuance to the holder of any
Right exercised after such record date the number of one
one-thousandths of a share of Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such
exercise over and above the number of one one-thousandths of a
share of Preferred Stock and other capital stock or securities of
the Company, if any, issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment; provided,
however, that the Company will deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to
receive such additional shares (fractional or otherwise) or
securities upon the occurrence of the event requiring such
adjustment.
(m) Anything in this SECTION 11 to the contrary
notwithstanding, the Company will be entitled to make such
reductions in the Purchase Price, in addition to those adjustments
expressly required by this SECTION 11, as and to the extent that,
in its good faith judgment, the Board of Directors of the Company
determines it to be advisable in order that any (i) consolidation
or subdivision of the Preferred Stock, (ii) issuance wholly for
cash of any shares of Preferred Stock at less than the current
market price, (iii) issuance wholly for cash of shares of Preferred
Stock or securities that by their terms are convertible into or
exchangeable for shares of Preferred Stock, (iv) stock dividends,
or (v) issuance of rights, options, or warrants referred to in this
SECTION 11, hereafter made by the Company to holders of its
Preferred Stock will not be taxable to such stockholders.
(n) The Company covenants and agrees that it will not, at
any time after the Distribution Date, (i) consolidate with any
other Person (other than a Subsidiary of the Company in a
transaction that complies with SECTION 11(o)), (ii) merge with,
from, or into any other Person (other than a Subsidiary of the
Company in a transaction that complies with SECTION 11(o)), or
(iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a
24
<PAGE>
series of related transactions, assets or earning power aggregating
more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company or any of its Subsidiaries in one or more
transactions each of which complies with SECTION 11(o)), if (x) at
the time of or immediately after such consolidation, merger, sale,
or transfer, there are any rights, warrants, or other instruments
or securities outstanding or agreements in effect that could
reasonably be expected to substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights or (y)
prior to, simultaneously with, or immediately after, such
consolidation, merger, sale, or transfer, the stockholders of the
Person that constitutes, or would constitute, the "PRINCIPAL PARTY"
for purposes of SECTION 13(a) has received a distribution of Rights
previously owned by such Person or any of its Affiliates and
Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by SECTION 23
or SECTION 26, take (or permit any Subsidiary to take) any action
if at the time such action is taken it is reasonably foreseeable
that such action will diminish substantially or otherwise eliminate
the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company at any time after
the Rights Dividend Declaration Date and prior to the Distribution
Date (i) declares a dividend on the outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivides the
outstanding shares of Common Stock, or (iii) combines the
outstanding shares of Common Stock into a smaller number of shares,
the number of Rights associated with each share of Common Stock
then outstanding, or issued or delivered thereafter but prior to
the Distribution Date, will be proportionately adjusted so that the
number of Rights thereafter associated with each share of Common
Stock following any such event will equal the result obtained by
multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction the
numerator of which is the total number of shares of Common Stock
outstanding immediately prior to the occurrence of the event and
the denominator of which is the total number of shares of Common
Stock outstanding immediately following the occurrence of such
event.
(q) In the event that the Rights become exercisable
following a Section 11(a)(ii) Event, the Company, by action of a
Requisite Majority, may permit the Rights, subject to SECTION 7(e),
to be exercised for 50% of the shares of Common Stock (or cash or
other securities or assets to be substituted for the Adjustment
Shares pursuant to SECTION 11(a)(iii)) that would otherwise be
purchasable under SECTION 11(a) in consideration of the surrender
to the Company of the Rights so exercised and without other payment
of the Purchase
25
<PAGE>
Price. Rights exercised under this SECTION 11(q) will be deemed to
have been exercised in full and will be cancelled.
(r) The failure by the Board of Directors at any time to
determine a Person to be an Adverse Person following such Person
becoming a Beneficial Owner of 10% or more of the outstanding
Common Stock will not create any implication that such Person is
not or may not later be determined to be an Adverse Person.
Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES. Whenever an adjustment is made as provided in SECTION 11 or
SECTION 13, the Company will (a) promptly prepare a certificate setting
forth such adjustment and a brief statement of the facts accounting for
such adjustment, (b) promptly file with the Rights Agent, and with each
transfer agent for the Preferred Stock and the Common Stock, a copy of
such certificate, and (c) mail a brief summary thereof to each holder of
a Rights Certificate (or, if prior to the Distribution Date, to each
holder of a certificate representing shares of Common Stock) in
accordance with SECTION 25. The Rights Agent will be fully protected in
relying on any such certificate and on any adjustment contained in such
certificate.
Section 13. CONSOLIDATION, MERGER, OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) In the event that, following the Stock Acquisition
Date, directly or indirectly, (x) the Company consolidates with, or
merges from, with, or into, any other Person (other than a
Subsidiary of the Company in a transaction that complies with
SECTION 11(o)), and the Company is not the continuing or surviving
Person of such consolidation or merger; (y) any Person (other than
a Subsidiary of the Company in a transaction that complies with
SECTION 11(o)) consolidates with, or merges from, with, or into,
the Company, and the Company is the continuing or surviving
corporation of such consolidation or merger and, in connection with
such consolidation or merger, all or part of the outstanding shares
of Common Stock of the Company is changed into or exchanged for
stock or other securities of any other Person or cash or any other
property; or (z) the Company sells or otherwise transfers (or one
or more of its Subsidiaries sells or otherwise transfers), in one
transaction or a series of related transactions, assets or earning
power aggregating more than 50% of the assets or earning power of
the Company and its Subsidiaries (taken as a whole) to any Person
or Persons (other than the Company or any Subsidiary of the Company
in one or more transactions each of which complies with SECTION
11(o)), then, and in each such case (except as contemplated by
SECTION 13(d)), proper provision will be made so that (i) each
holder of a Right, except as provided in SECTION 7(e) or SECTION
13(e), will thereafter have the right to receive, upon the exercise
of such Right at the then current Purchase Price in accordance with
the terms of this Agreement, such number of validly authorized and
issued, fully paid,
26
<PAGE>
nonassessable, and freely tradable shares of Common Stock of the
Principal Party (as defined below), not subject to any liens,
encumbrances, preemptive rights, rights of first refusal, or other
adverse claims, as are equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one
one-thousandths of a share of Preferred Stock for which a Right is
exercisable immediately prior to the first occurrence of a Section
13 Event (or, if a Section 11(a)(ii) Event has occurred prior to
the first occurrence of a Section 13 Event, multiplying the number
of such one one-thousandths of a share for which a Right was
exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event by the Purchase Price in effect immediately prior
to such first occurrence), and dividing that product (which,
following the first occurrence of a Section 13 Event, will be
referred to as the "PURCHASE PRICE" for each Right and for all
purposes of this Agreement) by (2) 50% of the Current Market Price
(determined pursuant to SECTION 11(d)(i)) per share of the Common
Stock of such Principal Party on the date of consummation of such
Section 13 Event; (ii) such Principal Party will thereafter be
liable for, and will assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this
Agreement; (iii) the term "COMPANY" will thereafter be deemed to
refer to such Principal Party, it being specifically intended that
the provisions of SECTION 11 will apply only to such Principal
Party following the first occurrence of a Section 13 Event; (iv)
such Principal Party will take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its
Common Stock) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions of
this Agreement will thereafter be applicable, as nearly as may be,
in relation to its shares of Common Stock thereafter deliverable
upon the exercise of the Rights; and (v) the provisions of SECTION
11(a)(ii) will be of no effect following the first occurrence of
any Section 13 Event.
(b) "PRINCIPAL PARTY" means
(i) in the case of any transaction described in
CLAUSE (x) or (y) of the first sentence of SECTION 13(a), the
Person that is the issuer of any securities into which shares
of Common Stock of the Company are converted in such merger or
consolidation, and if no securities are so issued, the Person
that is the other party to such merger or consolidation; and
(ii) in the case of any transaction described in
CLAUSE (z) of the first sentence of SECTION 13(a), the Person
that is the party receiving the greatest portion of the assets
or earning power transferred pursuant to such transaction or
transactions;
provided, however, that in any such case, (1) if the Common
Stock of such Person is not at such time and has not been
continuously over the preceding twelve (12) month period
registered under Section 12 of the
27
<PAGE>
Exchange Act, and such Person is a direct or indirect
Subsidiary of another Person the Common Stock of which is and
has been so registered, "PRINCIPAL PARTY" will refer to such
other Person; and (2) in case such Person is a Subsidiary,
directly or indirectly, of more than one Person, the Common
Stocks of two or more of which are and have been so
registered, "PRINCIPAL PARTY" will refer to whichever of such
Persons is the issuer of the Common Stock having the greatest
aggregate market value.
(c) The Company will not consummate any such consolidation,
merger, sale, or transfer unless the Principal Party has a
sufficient number of authorized shares of its Common Stock that
have not been issued or reserved for issuance to permit the
exercise in full of the Rights in accordance with this SECTION 13
and unless prior thereto the Company and such Principal Party have
executed and delivered to the Rights Agent a supplemental agreement
providing for the Principal Party to assume and perform the terms
set forth in SECTIONS 13(a) and (b) and further providing that, as
soon as practicable after the date of any consolidation, merger, or
transfer mentioned in SECTION 13(a), the Principal Party will
(i) prepare and file a registration statement under
the Act, with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate
form, and will cause such registration statement to (A) become
effective as soon as practicable after such filing and (B)
remain effective (with a prospectus at all times meeting the
requirements of the Act) until the Expiration Date; and
(ii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its
Affiliates that comply in all respects with the requirements
for registration on Form 10 under the Exchange Act.
The provisions of this SECTION 13 will similarly apply to successive
mergers, consolidations, and sales or other transfers. In the event that
a Section 13 Event occurs at any time after the occurrence of a Section
11(a)(ii) Event, the Rights that have not theretofore been exercised
will thereafter become exercisable in the manner described in SECTION
13(a).
(d) Notwithstanding anything in this Agreement to the
contrary, SECTION 13 will not be applicable to a transaction
described in CLAUSE (x) and (y) of the first sentence of SECTION
13(a) if (i) such transaction is consummated with a Person or
Persons that acquired shares of Common Stock of the Company
pursuant a tender offer or exchange offer for all outstanding
shares of Common Stock that complies with the provisions of SECTION
11(a)(ii)(B) (or a wholly owned subsidiary of any such Person or
Persons), (ii) the price per share of
28
<PAGE>
Common Stock offered in such transaction is not less than the price
per share of Common Stock paid to all holders of shares of Common
Stock whose shares were purchased pursuant to such tender offer or
exchange offer, and (iii) the form of consideration being offered
to the remaining holders of shares of Common Stock pursuant to such
transaction is the same as the form of consideration paid pursuant
to such tender offer or exchange offer. Upon consummation of any
such transaction contemplated by this SECTION 13(d), all Rights
under this Agreement will expire.
(e) In the event that the Rights become exercisable under SECTION
13(a), the Company, by action of a Requisite Majority, may agree
with the Principal Party that the Principal Party may permit the
Rights to be exercised for 50% of the Common Shares of the
Principal Party that would otherwise be purchasable under SECTION
13(a), in consideration of the surrender to the Principal Party, as
the successor to the Company under SECTION 13(a)(ii), of the Rights
so exercised and without other payment of the Purchase Price.
Rights exercised under this SECTION 13(e) will be deemed to have
been exercised in full and cancelled.
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company will not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in
SECTION 11(p), or to distribute Rights Certificates that evidence
fractional Rights. In lieu of such fractional Rights, there will be
paid to the registered holders of the Rights Certificates with
regard to which such fractional Rights would otherwise be issuable,
an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this SECTION 14(a), the
current market value of a whole Right will be the closing price of
the Rights for the Trading Day immediately prior to the date on
which such fractional Rights would have been otherwise issuable.
The closing price of the Rights for any day will be the last sale
price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the
Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which the Rights are listed or
admitted to trading, or if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or
such other system then in use or, if on any such date the Rights
are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker
making a market in the Rights selected by a Requisite Majority. If
on any such date no such market
29
<PAGE>
maker is making a market in the Rights the fair value of the Rights
on such date as conclusively determined in good faith by a
Requisite Majority will be used.
(b) The Company will not be required to issue fractions of
shares of Preferred Stock (other than fractions that are integral
multiples of one one-thousandth of a share of Preferred Stock) upon
exercise of the Rights or to distribute certificates that evidence
fractional shares of Preferred Stock (other than fractions that are
integral multiples of one one-thousandth of a share of Preferred
Stock). In lieu of fractional shares of Preferred Stock that are
not integral multiples of one one-thousandth of a share of
Preferred Stock, the Company may pay to the registered holders of
Rights Certificates at the time such Rights are exercised as
provided in this Agreement an amount in cash equal to the same
fraction of the current market value of one one-thousandth of a
share of Preferred Stock. For purposes of this SECTION 14(b), the
current market value of one one-thousandth of a share of Preferred
Stock will be one one-thousandth of the closing price of a share of
Preferred Stock (as determined pursuant to SECTION 11(d)(ii)) for
the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the
Company will not be required to issue fractions of shares of Common
Stock upon exercise of the Rights or to distribute certificates
that evidence fractional shares of Common Stock. In lieu of
fractional shares of Common Stock, the Company may pay to the
registered holders of Rights Certificates at the time such Rights
are exercised as provided in this Agreement an amount in cash equal
to the same fraction of the current market value of one share of
Common Stock. For purposes of this SECTION 14(c), the current
market value of one share of Common Stock will be the Current
Market Value of one share of Common Stock (as determined pursuant
to SECTION 11(d)(i)) for the Trading Day immediately prior to the
date of such exercise.
(d) The holder of a Right, by the acceptance of the Rights,
expressly waives the right to receive any fractional Rights or any
fractional shares upon exercise of a Right, except as permitted by
this SECTION 14.
Section 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered
holders of the Common Stock); and any registered holder of any Rights
Certificate (or, prior to the Distribution Date, of the Common Stock),
without the consent of the Rights Agent or of the holder of any other
Rights Certificate (or, prior to the Distribution Date, of the Common
Stock), may, in its own behalf and for its own benefit, enforce, and may
institute and maintain any suit, action, or proceeding against the
Company to enforce, or otherwise act in respect of, its right to
exercise the Rights evidenced by such Rights Certificate in the manner
provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any
30
<PAGE>
remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to
specific performance of the obligations under this Agreement and
injunctive relief against actual or threatened violations of the
obligations under this Agreement of any Person subject to this Agreement.
Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by
accepting the Rights consents and agrees with the Company and the Rights
Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates
are transferable only on the registry books of the Rights Agent if
surrendered at the principal office or offices of the Rights Agent
designated for such purposes, duly endorsed or accompanied by a
proper instrument of transfer, and with the appropriate forms and
certificates fully executed;
(c) subject to SECTION 6(a) and SECTION 7(f), the Company
and the Rights Agent may deem and treat the person in whose name a
Rights Certificate (or, prior to the Distribution Date, the
associated Common Stock certificate) is registered as the absolute
owner of the Rights evidenced thereby (notwithstanding any
notations of ownership or writing on the Rights Certificates or the
associated Common Stock certificate made by anyone other than the
Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last
sentence of SECTION 7(e), will be required to be affected by any
notice to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent will have any
liability to any holder of a Right or other Person as a result of
its inability to perform any of its obligations under this
Agreement by reason of any preliminary or permanent injunction or
other order, decree, or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory, or administrative
agency or commission, or any statute, rule, regulation, or
executive order promulgated or enacted by any governmental
authority, prohibiting or otherwise restraining performance of such
obligation; provided, however, the Company will use its reasonable
best efforts to have any such order, decree, or ruling lifted or
otherwise overturned as soon as possible.
Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Rights Certificate will be entitled to vote or
receive dividends or be deemed for any purpose the holder of the number
of one one-thousandths of a share of Preferred Stock or any other
securities of the Company that may at any time be
31
<PAGE>
issuable on the exercise of the Rights represented thereby, nor will
anything contained in this Agreement or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such,
any of the rights of a stockholder of the Company or any right to vote
for the election of directors or upon any matter submitted to
stockholders, or to give or withhold consent to any corporate action, or
to receive notice of meetings or other actions affecting stockholders
(except as provided in SECTION 24), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced
by such Rights Certificate have been exercised in accordance with the
provisions of this Agreement.
Section 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it under this
Agreement and, from time to time, on demand of the Rights Agent,
its reasonable expenses and counsel fees and disbursements and
other disbursements incurred in the administration and execution of
this Agreement and the exercise and performance of its duties under
this Agreement. The Company also agrees to indemnify the Rights
Agent for, and to hold it harmless against, any loss, liability, or
expense, incurred without negligence, bad faith, or willful
misconduct on the part of the Rights Agent, for anything done or
omitted to be done by the Rights Agent in connection with the
acceptance and administration of this Agreement, including, without
limitation, the costs and expenses of defending against any claim
of liability. In no case will the Rights Agent be liable for
special, indirect, incidental, or consequential loss or damages of
any kind whatsoever, even if the Rights Agent has been advised or
is otherwise aware of the likelihood of such loss or damage.
(b) The Rights Agent will be protected and will incur no
liability for or in respect of any action taken, suffered, or
omitted by it in connection with its administration of this
Agreement in reliance upon any Rights Certificate or certificate
for Common Stock or for other securities of the Company, instrument
of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine
and to be signed, executed, and, where necessary, verified or
acknowledged, by the proper Person or Persons.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any Person into or with which the Rights Agent or any
successor Rights Agent may be merged or with which it may be
consolidated, or any Person resulting from any merger or
consolidation to which the Rights Agent or any successor Rights
Agent is a party, or any corporation succeeding to the corporate
trust or shareholder services business of the Rights Agent or any
successor Rights Agent, will be the successor to the Rights Agent
under this Agreement without the execution or filing of any paper
or any further act on the
32
<PAGE>
part of any of the parties to this Agreement; provided, however,
that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of SECTION 21. In case
at the time such successor Rights Agent succeeds to the agency
created by this Agreement, any of the Rights Certificates have been
countersigned but not delivered, any such successor Rights Agent
may adopt the countersignature of a predecessor Rights Agent and
deliver such Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates not have been
countersigned, any successor Rights Agent may countersign such
Rights Certificates either in the name of the predecessor or in the
name of the successor Rights Agent; and in all such cases such
Rights Certificates will have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent is
changed and at such time any of the Rights Certificates have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights
Certificates so countersigned; and in case at that time any of the
Rights Certificates have not been countersigned, the Rights Agent
may countersign such Rights Certificates either in its prior name
or in its changed name, and in all such cases such Rights
Certificates will have the full force provided in the Rights
Certificates and in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following
terms and conditions, by all of which the Company and the holders of
Rights Certificates, by their acceptance of such Rights Certificates,
will be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the opinion of such
counsel will be full and complete authorization and protection to
the Rights Agent as to any action taken or omitted by it in good
faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent deems it necessary or desirable that any
fact or matter (including, without limitation, the identity of any
Acquiring Person or Adverse Person and the determination of
"Current Market Price") be proved or established by the Company
prior to taking or suffering any action under this Agreement, such
fact or matter (unless other evidence in respect of such fact or
matter is specifically prescribed in this Agreement) may be deemed
to be conclusively proved and established by a certificate signed
by the Chairman of the Board, the Chief Executive Officer, the
Chief Operating Officer, the President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary, or any Assistant
Secretary of the Company and delivered to the Rights Agent; and
such certificate will be full authorization to the Rights Agent for
33
<PAGE>
any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent will be liable under this Agreement
only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent will not be liable for or by reason of
any of the statements of fact or recitals contained in this
Agreement or in the Rights Certificates or be required to verify
the same (except as to its countersignature on such Rights
Certificates), but all such statements and recitals are and will be
deemed to have been made by the Company only.
(e) The Rights Agent will not be under any responsibility
in respect of the validity of this Agreement or the execution and
delivery of this Agreement (except the due execution of this
Agreement by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature);
nor will it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights
Certificate; nor will it be responsible for any adjustment required
under the provisions of SECTION 11 or SECTION 13, or responsible
for the manner, method, or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such
adjustment (except with respect to the exercise of Rights evidenced
by Rights Certificates after actual notice of any such adjustment);
nor will it by any act under this Agreement be deemed to make any
representation or warranty as to the authorization or reservation
of any shares of Common Stock or Preferred Stock to be issued
pursuant to this Agreement or any Rights Certificate or as to
whether any shares of Common Stock or Preferred Stock will, when so
issued, be validly authorized or issued, fully paid, or
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge, and deliver or cause to be performed, executed,
acknowledged, and delivered all such further and other acts,
instruments, and assurances as may reasonably be required by the
Rights Agent for the carrying out or performing by the Rights Agent
of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
under this Agreement from the Chairman of the Board, the Chief
Executive Officer, the Chief Operating Officer, the President, any
Vice President, the Secretary, any Assistant Secretary, the
Treasurer, or any Assistant Treasurer of the Company, and to apply
to such officers for advice or instructions in connection with its
duties, and it will not be liable for any action taken or suffered
to be taken by it in good faith in accordance with instructions of
any such officer.
34
<PAGE>
(h) The Rights Agent and any stockholder, director,
officer, or employee of the Rights Agent may buy, sell, or deal in
any of the Rights or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may
be interested, contract with or lend money to the Company, or
otherwise act as fully and freely as though it were not Rights
Agent under this Agreement. Nothing in this Agreement will preclude
the Rights Agent from acting in any other capacity for the Company
or for any other Person.
(i) The Rights Agent may execute and exercise any of the
rights or powers vested by this Agreement in it or perform any duty
under this Agreement either itself or by or through its attorneys
or agents, and the Rights Agent will not be answerable or
accountable for any act, default, neglect, or misconduct of any
such attorneys or agents or for any loss to the Company resulting
from any such act, default, neglect, or misconduct; provided,
however, reasonable care was exercised in the selection and
continued employment of such Person.
(j) No provision of this Agreement will require the Rights
Agent to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties under
this Agreement or in the exercise of its rights if there are
reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Right Certificate surrendered
to the Rights Agent for exercise or transfer, the certificate
attached to the form of assignment or form of election to purchase,
as the case may be, has either not been completed or indicates an
affirmative response to clause 1 or 2 of such certificate, the
Rights Agent will not take any further action with respect to such
requested exercise of transfer without first consulting with the
Company.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties
under this Agreement upon thirty (30) days' notice in writing mailed to
the Company, and to each transfer agent of the Common Stock and
Preferred Stock, by registered or certified mail, and to the holders of
the Rights Certificates by first-class mail. The Company may remove the
Rights Agent or any successor Rights Agent upon thirty (30) days' notice
in writing, mailed to the Rights Agent or successor Rights Agent, as the
case may be, and to each transfer agent of the Common Stock and
Preferred Stock, by registered or certified mail, and to the holders of
the Rights Certificates by first-class mail. If the Rights Agent resigns
or is removed or otherwise becomes incapable of acting, the Company will
appoint a successor to the Rights Agent. If the Company fails to make
such appointment within a period of thirty (30) days after giving notice
of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent
or by the holder of a Rights Certificate (who will, with such notice,
submit such holder's Rights Certificate for inspection by the Company),
then any registered holder of
35
<PAGE>
any Rights Certificate may apply to any court of competent jurisdiction
for the appointment of a new Rights Agent. Any successor Rights Agent,
whether appointed by the Company or by such a court, will be a
corporation organized and doing business under the laws of the United
States or a State of the United States, in good standing, that is
authorized under such laws to exercise corporate trust powers and is
subject to supervision or examination by federal or state authority and
that has at the time of its appointment as Rights Agent a combined
capital and surplus of at least $100,000,000. After appointment, the
successor Rights Agent will be vested with the same powers, rights,
duties, and responsibilities as if it had been originally named as
Rights Agent without further act or deed, except that the predecessor
Rights Agent will deliver and transfer to the successor Rights Agent any
property at the time held by it under this Agreement and execute and
deliver any further assurance, conveyance, act, or deed necessary for
the purpose. Not later than the effective date of any such appointment,
the Company will file notice of such appointment in writing with the
predecessor Rights Agent and each transfer agent of the Common Stock and
the Preferred Stock, and mail a notice of such appointment in writing to
the registered holders of the Rights Certificates. Failure to give any
notice provided for in this SECTION 21, however, or any defect in such
notice, will not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights
Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding
any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, in its discretion, issue new Rights
Certificates evidencing Rights in such form as may be approved by its
Board of Directors to reflect any adjustment or change in the Purchase
Price and the number or kind or class of shares or other securities or
property purchasable under the Rights Certificates made in accordance
with the provisions of this Agreement. In addition, in connection with
the issuance or sale of shares of Common Stock following the
Distribution Date and prior to the redemption or expiration of the
Rights, the Company (a) will, with respect to shares of Common Stock so
issued or sold pursuant to the exercise of stock options or under any
employee plan or arrangement, granted or awarded as of the Distribution
Date, or upon the exercise, conversion, or exchange of securities issued
by the Company, and (b) may, in any other case, if deemed necessary or
appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection
with such issuance or sale; provided, however, that (y) no such Rights
Certificate will be issued if, and to the extent that, the Company is
advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the Company or the Person to whom
such Rights Certificate would be issued, and (z) no such Rights
Certificate will be issued if, and to the extent that, appropriate
adjustment has otherwise been made in lieu of the issuance of such
Rights Certificate.
36
<PAGE>
Section 23. REDEMPTION AND TERMINATION.
(a) The Company may, at its option, by action of its Board
of Directors at any time prior to the earlier of (i) the Close of
Business on the tenth day following the Stock Acquisition Date (or,
if the Stock Acquisition Date has occurred prior to the Record
Date, the Close of Business on the tenth day following the Record
Date), or (ii) the Final Expiration Date, redeem all but not less
than all the then outstanding Rights at a redemption price of $0.01
per Right, as such amount may be appropriately adjusted to reflect
any stock split, stock dividend, or similar transaction occurring
after the date of this Agreement (such redemption price being
referred to as the "REDEMPTION PRICE"); provided, however, there
must be at least two Continuing Directors then in office and such
authorization will require concurrence of a Requisite Majority if
the Board of Directors authorizes redemption of the Rights in
either of the following circumstances: (i) such authorization
occurs on or after the time any Person becomes an Acquiring Person
or an Adverse Person, or (ii) such authorization occurs on or after
the time of a change (resulting from a proxy or consent
solicitation) in a majority of the directors in office at the
commencement of such solicitation if any Person who is a
participant in such solicitation has stated (or, if on or after the
commencement of such solicitation, a majority of the Board of
Directors of the Company has determined in good faith) that such
Person (or any of its Affiliates or Associates) intends to take,
may consider taking, or reserves any right to take, any action that
would result in such Person becoming an Acquiring Person or that
would cause the occurrence of a Triggering Event; provided,
however, that if, following the occurrence of a Stock Acquisition
Date and following the expiration of the right of redemption under
this SECTION 23 but prior to any Triggering Event, (x) all
Acquiring Persons and Adverse Persons have transferred or otherwise
disposed of a number of Common Shares in one transaction or series
of transactions not directly or indirectly involving the Company or
any of its Subsidiaries that did not result in the occurrence of a
Triggering Event or the Company (with the approval of the Requisite
Majority) has issued additional equity securities, in either
instance such that each Acquiring Person and Adverse Person is
thereafter a Beneficial Owner of less that 10% of the outstanding
shares of Common Stock, and (y) there is no other Acquiring Person
or (in the good faith judgment of a Requisite Majority) Adverse
Person immediately following the occurrence of the event described
in CLAUSE (x), then the right of redemption will be reinstated and
thereafter be subject to the provisions of this SECTION 23.
Notwithstanding anything contained in this Agreement to the
contrary, the Rights will not be exercisable after the first
occurrence of a Section 11(a)(ii) Event except during the period
that the Company's right of redemption under this Agreement has
expired and not been reinstated. The Company may, at its option,
pay the Redemption Price, in cash, shares of Common Stock (based on
the Current Market Price as defined in SECTION 11(d)(i), of the
Common Stock at the time of redemption) or any other form of
consideration deemed appropriate by the Board of Directors.
37
<PAGE>
(b) Immediately upon the action of the Board of Directors
of the Company ordering the redemption of the Rights, evidence of
which has been filed with the Rights Agent and without any further
action and without any notice, the right to exercise the Rights
will terminate and the only right thereafter of the holders of
Rights will be to receive the Redemption Price for each Right so
held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company will give notice of such
redemption to the Rights Agent and the holders of the then
outstanding Rights by mailing such notice to all such holders at
each holder's last address as it appears upon the registry books of
the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Stock. Any
notice that is mailed in the manner in this Agreement provided will
be deemed given, whether or not the holder receives the notice.
Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
Section 24. NOTICE OF CERTAIN EVENTS.
(a) In case the Company proposes, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any
class to the holders of Preferred Stock or to make any other
distribution to the holders of Preferred Stock (other than a
regular quarterly cash dividend out of earnings or retained
earnings of the Company); (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any
additional shares of Preferred Stock or shares of stock of any
class or any other securities, rights, or options; (iii) to effect
any reclassification of its Preferred Stock (other than a
reclassification involving only the subdivision of outstanding
shares of Preferred Stock); (iv) to effect any consolidation or
merger from, into, or with any other Person (other than a
Subsidiary of the Company in a transaction that complies with
SECTION 11(o)), or to effect any sale or other transfer (or to
permit one or more of its Subsidiaries to effect any sale or other
transfer), in one transaction or a series of related transactions,
of more than 50% of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company or any of its Subsidiaries in one or more
transactions each of which complies with SECTION 11(o)); or (v) to
effect the liquidation, dissolution or winding up of the Company,
then, in each such case, the Company will give to each holder of a
Rights Certificate, to the extent feasible and in accordance with
SECTION 25, a notice of such proposed action, which will specify
the record date for the purposes of such stock dividend,
distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of the shares of
Preferred Stock, if any such date is to be fixed, and such notice
will be so given in the case of any action covered by CLAUSE (i) or
(ii) above at least twenty (20) days prior to the record date for
determining holders of the shares of Preferred Stock for purposes
38
<PAGE>
of such action, and in the case of any such other action, at least
twenty (20) days prior to the date of the taking of such proposed
action or the date of participation in such proposed action by the
holders of the shares of Preferred Stock, whichever is the earlier.
(b) In case any of the events set forth in SECTION
11(a)(ii) occurs, then, in any such case, (i) the Company will as
soon as practicable give to each holder of a Rights Certificate, to
the extent feasible and in accordance with SECTION 25, a notice of
the occurrence of such event, which will specify the event and the
consequences of the event to holders of Rights under SECTION
11(a)(ii), and (ii) all references in SECTION 24(a) to Preferred
Stock will be deemed thereafter to refer to Common Stock or, if
appropriate, other securities.
Section 25. NOTICES. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of
any Rights Certificate to or on the Company will be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Rights Agent) as follows:
Anchor Gaming
815 Pilot Road
Suite G
Las Vegas, Nevada 89119
Attention: Chief Executive Officer
with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street
Suite 2800
Dallas, Texas 75201
Attention: Glen Hettinger
Subject to the provisions of SECTION 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by
the holder of any Rights Certificate to or on the Rights Agent will be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company)
as follows:
The Chase Manhattan Bank
450 W. 33rd Street
New York NY 10001
Attention: Eric Leason
GTS Controller's Office
15th Floor
39
<PAGE>
Notices or demands authorized by this Agreement to be given or made
by the Company or the Rights Agent to the holder of any Rights
Certificate (or, if prior to the Distribution Date, to the holder of
certificates representing shares of Common Stock) will be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed to
such holder at the address of such holder as shown on the registry books
of the Company.
Section 26. SUPPLEMENT AND AMENDMENTS. Prior to the Distribution
Date and subject to the penultimate sentence of this SECTION 26, the
Company and the Rights Agent will, if the Company so directs, supplement
or amend any provision of this Agreement without the approval of any
holders of certificates representing shares of Common Stock. From and
after the Distribution Date and subject to the penultimate sentence of
this SECTION 26, the Company and the Rights Agent will, if the Company
so directs, supplement or amend this Agreement without the approval of
any holders of Rights Certificates in order (i) to cure any ambiguity,
(ii) to correct or supplement any provision contained in this Agreement
that may be defective or inconsistent with any other provision in this
Agreement, (iii) to shorten or lengthen any time period under this
Agreement (which lengthening or shortening, following the first
occurrence of an event set forth in CLAUSES (i) and (ii) of the first
proviso to SECTION 23(a), will be effective only if there are at least
two Continuing Directors and will require the concurrence of a Requisite
Majority), or (iv) to change or supplement the provisions under this
Agreement in any manner that the Company may deem necessary or desirable
and that will not adversely affect the interests of the holders of
Rights Certificates (other than an Acquiring Person or an Adverse Person
or an Affiliate or Associate of an Acquiring Person or an Adverse
Person); provided, however, this Agreement may not be supplemented or
amended to lengthen, pursuant to CLAUSE (iii) of this sentence, (A) a
time period relating to when the Rights may be redeemed at such time as
the Rights are not then redeemable, or (B) any other time period unless
such lengthening is for the purpose of protecting, enhancing, or
clarifying the rights of, or the benefits to, the holders of Rights.
Upon the delivery of a certificate from an appropriate officer of the
Company that states that the proposed supplement or amendment is in
compliance with the terms of this SECTION 26, the Rights Agent will
execute such supplement or amendment. Notwithstanding anything contained
in this Agreement to the contrary after the occurrence of a Distribution
Date, no supplement or amendment will be made that changes the
Redemption Price, the Final Expiration Date, the Purchase Price or the
number of one one-thousandths of a share of Preferred Stock for which a
Right is exercisable. Prior to the Distribution Date, the interests of
the holders of Rights will be deemed coincident with the interests of
the holders of Common Stock.
Section 27. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent will
bind and inure to the benefit of their respective successors and assigns
under this Agreement.
40
<PAGE>
Section 28. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS,
ETC. For all purposes of this Agreement, any calculation of the number
of shares of Common Stock outstanding at any particular time, including
for purposes of determining the particular percentage of such
outstanding shares of Common Stock of which any Person is the Beneficial
Owner, will be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange
Act as in effect on the date of this Agreement. The Board of Directors
of the Company (with, where specifically provided for in this Agreement,
the concurrence of the Continuing Directors) will have the exclusive
power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board (with, where
specifically provided for in this Agreement, the concurrence of the
Continuing Directors) or to the Company, or as may be necessary or
advisable in the administration of this Agreement, including, without
limitation, the right and power to (a) interpret the provisions of this
Agreement, and (b) make all determinations deemed necessary or advisable
for the administration of this Agreement (including, without limitation,
a determination to redeem or not redeem the Rights or to amend the
Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of CLAUSE (y) below, all
omissions with respect to the foregoing) that are done or made by the
Board (with, where specifically provided for in this Agreement, the
concurrence of the Continuing Directors) in good faith, will (x) be
final, conclusive, and binding on the Company, the Rights Agent, the
holders of the Rights, and all other Persons, and (y) not subject the
Board or the Continuing Directors to any liability to the holders of the
Rights.
Section 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
will be construed to give to any Person other than the Company, the
Rights Agent, and the registered holders of the Rights Certificates
(and, prior to the Distribution Date, registered holders of the Common
Stock) any legal or equitable right, remedy, or claim under this
Agreement; and this Agreement will be for the sole and exclusive benefit
of the Company, the Rights Agent, and the registered holders of the
Rights Certificates (and, prior to the Distribution Date, registered
holders of the Common Stock).
Section 30. SEVERABILITY. If any term, provision, covenant, or
restriction of this Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void, or unenforceable,
the remainder of the terms, provisions, covenants, and restrictions of
this Agreement will remain in full force and effect and will in no way
be affected, impaired, or invalidated; provided, however, that
notwithstanding anything in this Agreement to the contrary, if any such
term, provision, covenant, or restriction is held by such court or
authority to be invalid, void, or unenforceable and the Board of
Directors of the Company determines in good faith that severing the
invalid language from this Agreement would adversely affect the purpose
or effect of this Agreement, the right of redemption set forth in
SECTION 23 will be reinstated and will not expire until the Close of
Business on the tenth day following the date of such determination by
the Board of Directors. Without limiting the foregoing, if any provision
requiring a majority of the Board of Directors of the Company to be
Continuing Directors to act is held by any
41
<PAGE>
court of competent jurisdiction or other authority to be invalid, void,
or unenforceable, such determination will then be made by the Board of
Directors of the Company in accordance with applicable law and the
Company's Certificate of Incorporation and By-Laws.
Section 31. GOVERNING LAW. This Agreement, each Right, and each
Rights Certificate issued under this Agreement will be deemed to be a
contract made under the laws of the State of Nevada and for all purposes
will be governed by and construed in accordance with the laws of such
State applicable to contracts made and to be performed entirely within
such State.
Section 32. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts will for all
purposes be deemed to be an original, and all such counterparts will
together constitute but one and the same instrument.
Section 33. INTERPRETATION. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and will
not control or affect the meaning or construction of any of the
provisions of this Agreement. References in this Agreement to Sections
and Exhibits are references to the Sections of and Exhibits to this
Agreement unless the context requires otherwise. In this Agreement, the
word "or" is not exclusive.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and their respective corporate seals to be hereunto
affixed and attested, all as of the day and year first above written.
Attest: /s/ T. J. MATTHEWS ANCHOR GAMING
-------------------
By: /s/ MIKE ROMBOLZ
------------------
Name: Mike Rombolz
------------------
Its:
------------------
Attest: /s/ FLORENCE CURLEY THE CHASE MANHATTAN BANK
-------------------
By: /s/ ERIC LEASON
------------------
Name: Eric Leason
------------------
Its:
------------------
42
<PAGE>
Exhibit A
to Rights Agreement
CERTIFICATE OF DESIGNATION, PREFERENCES,
AND RIGHTS OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
of
ANCHOR GAMING
Pursuant to Section 78.155 of the General Corporation Law of the State
of Nevada
The undersigned officers of Anchor Gaming (the "CORPORATION"), a
corporation organized and existing under the General Corporation Law of the
State of Nevada, in accordance with the provisions of Section 78.195
thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Restated Articles of Incorporation of such Corporation, such Board of
Directors on August 26, 1997, adopted the resolutions set forth below
creating a series of 50,000 shares of Preferred Stock designated as "Series A
Junior Participating Preferred Stock":
That no shares of Series A Junior Participating Preferred Stock have
heretofore been issued.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Amended and Restated Certificate of Incorporation, a series of Preferred
Stock of the Corporation be and it hereby is created, and that the
designation and amount thereof and the voting powers, preferences, and
relative, participating, optional, and other special rights of the shares of
such series, and the qualifications, limitations, or restrictions thereof are
as follows:
(1) DESIGNATION AND AMOUNT. The shares of such series will be
designated as "Series A Junior Participating Preferred Stock" and the number
of shares constituting such series will be 50,000.
(2) DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of shares of Series A Junior Participating
Preferred Stock will be entitled to receive, when, as, and if declared
by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last day of March,
June, September, and December in each year (each such date being
referred to as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the
first Quarterly Dividend Payment Date after the first
A-1
<PAGE>
issuance of a share or fraction of a share of Series A Junior
Participating Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (i) $0.01 or (ii) subject to the
provision for adjustment set forth below, one thousand times the
aggregate per share amount of all cash dividends, and one thousand times
the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions other than a dividend payable in shares
of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock,
par value $.01 per share, of the Corporation (the "COMMON STOCK") since
the immediately preceding quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Junior
Participating Preferred Stock. In the event the Corporation at any time
after October 20, 1997 (the "RIGHTS DECLARATION DATE") (i) declares any
dividend on Common Stock payable in shares of Common Stock, (ii)
subdivides the outstanding Common Stock, or (iii) combines the
outstanding Common Stock into a smaller number of shares, then in each
such case the amount to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to such
event under CLAUSE (ii) of the preceding sentence will be adjusted by
multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(b) The Corporation will declare a dividend or distribution on
the Series A Junior Participating Preferred Stock as provided in SECTION
2(a) above immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution has been
declared on the Common Stock during the period between any quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $1.00 per share on the Series A Junior Participating
Preferred Stock will nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends will begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from
the Quarterly Dividend Payment Date next preceding the date of issue of
such shares of Series A Junior Participating Preferred Stock, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
will begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends will begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends will not bear
A-2
<PAGE>
interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares will be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date will be no more than 30
days prior to the date fixed for the payment thereof.
(3) VOTING RIGHTS.
(a) The holders of shares of Series A Junior Participating
Preferred Stock will have the following voting rights:
Subject to the provision for adjustment set forth below, each share
of Series A Junior Participating Preferred Stock will entitled the
holder to a number of votes on all matters submitted to a vote of the
stockholders of the Corporation equal to one thousand times the number
of votes per share to which shares of Common Stock are entitled. In the
event the Corporation at any time after the Rights Declaration Date (i)
declares any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivides the outstanding Common Stock, or (iii) combines the
outstanding Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of shares of
Series A Junior Participating Preferred Stock were entitled immediately
prior to such event will be adjusted by multiplying such number by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(b) Except as otherwise provided in this Agreement or by law, the
holders of shares of Series A Junior Participating Preferred Stock and the
holders of shares of Common Stock will vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(c) (i) If at any time dividends on any Series A Junior
Participating Preferred Stock are in arrears in an amount equal to six
(6) quarterly dividends thereon, the occurrence of such contingency will
mark the beginning of a period (a "DEFAULT PERIOD") that will extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period
on all shares of Series A Junior Participating Preferred Stock then
outstanding have been declared and paid or set apart for payment. During
each default period, all holders of preferred stock of the Corporation
(the "PREFERRED STOCK") (including holders of the Series A Junior
Participating Preferred Stock) with dividends in arrears in an amount
equal to six (6) quarterly dividends
A-3
<PAGE>
thereon, voting as a class, irrespective of series, will have the right
to elect two (2) Directors.
(ii) During any default period, such voting right of the holders
of Series A Junior Participating Preferred Stock may be exercised
initially at a special meeting called pursuant to SECTION 3(c)(iii) or
at any annual meeting of stockholders, and thereafter at annual meetings
of stockholders, provided that such voting right will not be exercised
unless the holders of ten percent (10%) in number of shares of Preferred
Stock outstanding are present in person or by proxy. The absence of a
quorum of the holders of Common Stock will not affect the exercise by
the holders of Preferred Stock of such voting right. At any meeting at
which the holders of Preferred Stock exercise such voting right
initially during an existing default period, they will have the right,
voting as a class, to elect Directors to fill such vacancies, if any, in
the Board of Directors as may then exist up to two (2) Directors or, if
such right is exercised at an annual meeting, to elect two (2)
Directors. If the number that may be so elected at any special meeting
does not amount to the required number, the holders of the Preferred
Stock will have the right to make such increase in the number of
Directors as is necessary to permit the election by them of the required
number. After the holders of the Preferred Stock have exercised their
right to elect Directors in any default period and during the
continuance of such period, the number of Directors will not be
increased or decreased except by vote of the holders of Preferred Stock
as provided herein or pursuant to the rights of any equity securities
ranking senior to or pari passu with the Series A Junior Participating
Preferred Stock.
(iii) Unless the holders of Preferred Stock, during an existing
default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective
of series, may request, the calling of a special meeting of the holders
of Preferred Stock, which meeting will thereupon be called by the Chief
Executive Officer, the Chief Operating Officer, the President, a
Vice-President, or the Secretary of the Corporation. Notice of such
meeting and of any annual meeting at which holders of Preferred Stock
are entitled to vote pursuant to this SECTION 3(c)(iii) will be given to
each holder of record of Preferred Stock by mailing a copy of such
notice such holder at such holder's last address as it appears on the
books of the Corporation. Such meeting will be called for a time not
earlier than 20 days and not later than 60 days after such order or
request or in default of the calling of such meeting within 60 days
after such order or request, such meeting may be called on similar
notice by any stockholder or stockholders owning in the aggregate not
less than ten percent (10%) of the total number of shares of Preferred
Stock
A-4
<PAGE>
outstanding. Notwithstanding the provisions of this SECTION 3(c)(iii),
no such special meeting will be called during the period within 60 days
immediately preceding the date fixed for the next annual meeting of the
stockholders.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation if applicable, will continue
to be entitled to elect the whole number of Directors until the holders
of Preferred Stock have exercised their right to elect two (2) Directors
voting as a class, after the exercise of which right (x) the Directors
so elected by the holders of Preferred Stock will continue in office
until their successors have been elected by such holders or until the
expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in SECTION 3(c)(ii)) be filled by vote
of a majority of the remaining Directors theretofore elected by the
holders of the class of stock that elected the Director whose office has
become vacant. References in this SECTION 3(c) to Directors elected by
the holders of a particular class of stock will include Directors
elected by such Directors to fill vacancies as provided in clause (y) of
the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect Directors
will cease, (y) the term of any Directors elected by the holders of
Preferred Stock as a class will terminate, and (z) the number of
Directors will be such number as may be provided for in the articles of
incorporation or by-laws irrespective of any increase made pursuant to
the provisions of SECTION 3(c)(ii) (such number being subject, however,
to change thereafter in any manner provided by law or in the articles of
incorporation or by-laws). Any vacancies in the Board of Directors
effected by the provisions of CLAUSES (y) and (z) in the preceding
sentence may be filled by a majority of the remaining Directors.
Except as set forth herein, holders of Series A Junior Participating
Preferred Stock will have no special voting rights and their consent will not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
(4) CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating Preferred
Stock as provided in SECTION 2 are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared,
on shares of Series A Junior Participating Preferred Stock outstanding
have been paid in full, the Corporation will not
A-5
<PAGE>
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution, or winding up) to the
Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution, or winding up) with
the Series A Junior Participating Preferred Stock, except dividends
paid ratably on the Series A Junior Participating Preferred Stock
and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of
all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution, or winding up) with the
Series A Junior Participating Preferred Stock, provided that the
Corporation may at any time redeem, purchase, or otherwise acquire
shares of any such parity stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation, or winding up) to the Series A Junior
Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock, or any
shares of stock ranking on a parity with the Series A Junior
Participating Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, determines in good faith will result
in fair and equitable treatment among the respective series or
classes.
(b) The Corporation will not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
SECTION 4(a), purchase or otherwise acquire such shares at such time and
in such manner.
(5) REACQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever will be retired and cancelled promptly after the
acquisition thereof. All such shares will upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock to be created by resolution
A-6
<PAGE>
or resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
(6) LIQUIDATION, DISSOLUTION, OR WINDING UP.
(a) Upon any liquidation (voluntary or otherwise), dissolution,
or winding up of the Corporation, no distribution will be made to the
holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution, or winding up) to the Series A Junior
Participating Preferred Stock unless, prior thereto, the holders of
shares of Series A Junior Participating Preferred Stock have received an
amount equal to $400,000.00, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the
date of such payment (the "SERIES A LIQUIDATION PREFERENCE"). Following
the payment of the full amount of the Series A Liquidation Preference,
no additional distributions will be made to the holders of shares of
Series A Junior Participating Preferred Stock unless, prior thereto, the
holders of shares of Common Stock have received an amount per share (the
"COMMON ADJUSTMENT") equal to the quotient obtained by dividing (i) the
Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted
as set forth in SECTION 6(c) to reflect such events as stock splits,
stock dividends, and recapitalizations with respect to the Common Stock)
(such number in CLAUSE (ii), the "ADJUSTMENT NUMBER"). Following the
payment of the full amount of the Series A Liquidation Preference and
the Common Adjustment in respect of all outstanding shares of Series A
Junior Participating Preferred Stock and Common Stock, respectively,
holders of Series A Junior Participating Preferred Stock and holders of
shares of Common Stock will receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio of the
Adjustment Number to 1 with respect to such Preferred Stock and Common
Stock, on a per share basis, respectively.
(b) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of
preferred stock, if any, that rank on a parity with the Series A Junior
Participating Preferred Stock, then such remaining assets will be
distributed ratably to the holders of such parity shares in proportion
to their respective liquidation preferences. In the event, however, that
there are not sufficient assets available to permit payment in full of
the Common Adjustment, then such remaining assets will be distributed
ratably to the holders of Common Stock.
(c) In the event the Corporation at any time after October 20,
1997 (i) declares any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivides the outstanding Common Stock, or (iii)
combines the outstanding Common Stock into a smaller number of shares,
then in each such case the Adjustment Number in effect immediately prior
to such event will be adjusted by multiplying such Adjustment Number by
a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the
A-7
<PAGE>
number of shares of Common Stock that were outstanding immediately prior
to such event.
(7) CONSOLIDATION, MERGER, ETC. In case the Corporation enters into
any consolidation, merger, combination, or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash, and/or any other property, then in any such case the shares
of Series A Junior Participating Preferred Stock will at the same time be
similarly exchanged or changed in an amount per share (subject to the
provision for adjustment set forth below) equal to one thousand times the
aggregate amount of stock, securities, cash, and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation at any
time after October 20, 1997 (i) declares any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivides the outstanding Common Stock, or
(iii) combines the outstanding Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series A Junior Participating
Preferred Stock will be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(8) NO REDEMPTION. The shares of Series A Junior Participating
Preferred Stock will not be redeemable.
(9) AMENDMENT. The Restated Articles of Incorporation of the
Corporation will not be further amended in any manner that would materially
alter or change the powers, preferences, or special rights of the Series A
Junior Participating Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of a majority or more of the outstanding
shares of Series A Junior Participating Preferred Stock, voting separately as
a class.
(10) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock
may be issued in fractions of a share that entitle the holder, in proportion
to such holders fractional shares, to exercise voting rights, receive
dividends, participate in distributions, and to have the benefit of all other
rights of holders of Series A Junior Participating Preferred Stock.
A-8
<PAGE>
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and
do affirm the foregoing as true under the penalties of perjury this __ day of
October, 1997.
ANCHOR GAMING
By: ___________________________________
Name: _________________________________
Title: ________________________________
By: ___________________________________
Name: _________________________________
Title: ________________________________
The foregoing instrument was acknowledged before me by
____________________ and ____________________ on the ___ day of October 1997,
in the capacities indicated.
_______________________________________
(Notary)
A-9
<PAGE>
Exhibit B
to Rights Agreement
Form of Rights Certificate
Certificate No. R-________ Rights
NOT EXERCISABLE AFTER OCTOBER 17, 2007 OR EARLIER IF REDEEMED BY THE
COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY,
AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER
CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN
ADVERSE PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON OR ADVERSE
PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT
HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS
RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO IS, WAS, OR
BECAME AN ACQUIRING PERSON OR AN ADVERSE PERSON OR AN AFFILIATE OR ASSOCIATE OF
AN ACQUIRING PERSON OR AN ADVERSE PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED
IN SUCH AGREEMENT.]
Rights Certificate
ANCHOR GAMING
This certifies that _____________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions, and conditions
of the Rights Agreement, dated as of October 17, 1997 (as amended from time
to time, the "RIGHTS AGREEMENT"), between Anchor Gaming, a Nevada corporation
(the "COMPANY"), and The Chase Manhattan Bank, (the "RIGHTS AGENT"), to
purchase from the Company at any time prior to 5:00 p.m. (Las Vegas, Nevada
time) on October 17, 2007 at the office or offices of the Rights Agent
designated for such purpose, or its successors as Rights Agent, one
one-thousandth of a fully paid, nonassessable share of Series A Junior
Participating Preferred Stock (the "PREFERRED STOCK") of the Company, at a
purchase price of $400.00 per one one-thousandth of a share (the "PURCHASE
PRICE"), upon presentation and surrender of this Rights Certificate with the
Form of Election to Purchase and related Certificate duly executed. The
number of Rights evidenced by this Rights Certificate (and the number of
shares that may be purchased upon exercise thereof) set forth above, and the
Purchase Price per share set forth above, are the number and Purchase Price
as of October 20, 1997 based on the Preferred Stock as constituted at such
date. The Company reserves the right to require prior to the occurrence of a
B-1
<PAGE>
Triggering Event (as such term is defined in the Rights Agreement) that a
number of Rights be exercised so that only whole shares of Preferred Stock
will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Adverse
Person or an Affiliate or Associate of any such Acquiring Person or Adverse
Person (as such terms are defined in the Rights Agreement), (ii) a transferee
of any such Acquiring Person, Adverse Person, Associate, or Affiliate, or
(iii) under certain circumstances specified in the Rights Agreement, a
transferee of a Person who, after such transfer, became an Acquiring Person
or an Adverse Person, or an Affiliate or Associate of an Acquiring Person or
an Adverse Person, such Rights will become null and void and no holder of
this certificate will have any right with respect to such Rights from and
after the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities, that may be
purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events, including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions, and
conditions of the Rights Agreement, which terms, provisions, and conditions
are hereby incorporated in this Rights Certificate by reference and made a
part of this certificate and to which Rights Agreement reference is hereby
made for a full description of the rights, limitations of rights,
obligations, duties, and immunities hereunder of the Rights Agent, the
Company, and the holders of the Rights Certificates, which limitations of
rights include the temporary suspension of the exercisability of such Rights
under the certain circumstances set forth in the Rights Agreement. Copies of
the Rights Agreement are on file at the above-mentioned office of the Rights
Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one one-thousandths of a share of
Preferred Stock as the Rights evidenced by the Rights Certificate or Rights
Certificates surrendered have entitled such holder to purchase. If this
Rights Certificate is exercised in part, the holder will be entitled to
receive upon surrender of this Rights Certificate another Rights Certificate
or Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company at its option at a
redemption price of $0.01 per Right at any time prior to the earlier of the
Close of Business on (i) the tenth day following the Stock Acquisition Date
(as such time period may be extended
B-2
<PAGE>
pursuant to the Rights Agreement), and (ii) the Final Expiration Date. In
addition, in certain circumstances the Rights may be exchanged, in whole or
in part, for shares of the Common Stock, or shares of preferred stock of the
Company having essentially the same value or economic rights as such shares.
Immediately upon the action of the Board of Directors of the Company
authorizing any such exchange, and without any further action or any notice,
the Rights (other than Rights that are not subject to such exchange) will
terminate and the Rights will only enable holders to receive the shares
issuable upon such exchange. Under certain circumstances set forth in the
Rights Agreement, the decision to redeem the Rights will require the
concurrence of a majority of the Continuing Directors.
No fractional shares of Preferred Stock will be issued upon the exercise
of any Right or Rights evidenced hereby (other than fractions that are
integral multiples of one one-thousandth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depository receipts),
but in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate will be entitled to vote or receive
dividends or be deemed for any purpose the holder of shares of Preferred
Stock or of any other securities of the Company that may at any time be
issuable on the exercise hereof, nor will anything contained in the Rights
Agreement or herein be construed to confer upon the holder of this
certificate, as such, any of the rights of a stockholder of the Company or
any right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or, to receive notice of meetings or other actions
affecting stockholders (except as provided in the Rights Agreement), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by this Rights Certificate have been exercised as provided
in the Rights Agreement.
This Rights Certificate will not be valid or obligatory for any purpose
until it has been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of ____________________
ATTEST: ANCHOR GAMING
___________________ By: ___________________________________
Title: ________________________________
B-3
<PAGE>
Countersigned:
THE CHASE MANHATTAN BANK
By ___________________________________
Authorized Signature
B-4
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Rights Certificate.)
FOR VALUE RECEIVED hereby sells, assigns, and transfer unto
(Please print name and address of transferee)
This Rights Certificate, together with all right, title, and interest
therein, and does hereby irrevocably constitute and appoint _________________
attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated:__________________, ____ _______________________________________
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned, or
transferred by or on behalf of a Person who is or was an Acquiring Person or
an Adverse Person or an Affiliate or Associate of any such Acquiring Person
or Adverse Person (as such terms are defined in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was, or subsequently became an Acquiring Person or an
Adverse Person or an Affiliate or Associate of an Acquiring Person or an
Adverse Person.
Dated:__________________, ____ _______________________________________
Signature
Signature Guaranteed:
B-5
<PAGE>
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
To: ANCHOR GAMING:
The undersigned hereby irrevocably elects to exercise __________ Rights
represented by this Rights Certificate to purchase the shares of Preferred
Stock issuable upon the exercise of the Rights (or such other securities of
the Company or of any other Person that may be issuable upon the exercise of
the Rights) and requests that certificates for such shares be issued in the
name of and delivered to:
Please insert social security or other identifying number
(please print name and address)
If such number of Rights are not all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance of such Rights will be
registered in the name of and delivered to:
please insert social security
or other identifying number
(please print name and address)
Dated:__________________, ____ _______________________________________
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person
or an Adverse Person or an Affiliate or Associate of any such Acquiring
Person or an Adverse Person (as such terms are defined in the Rights
Agreement);
B-6
<PAGE>
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ]did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or became an Acquiring Person or Adverse Person
or an Affiliate or Associate of an Acquiring Person or an Adverse Person.
Dated:__________________, ____ _______________________________________
Signature
Signature Guaranteed:
B-7
<PAGE>
Exhibit C
to Rights Agreement
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
On August 26, 1997, the Board of Directors of Anchor Gaming (the
"COMPANY") adopted a Stockholder Rights Plan, providing that one right (a
"RIGHT") will be attached to each share of common stock, par value $.01 per
share, of the Company (the "COMMON STOCK") as of October 20, 1997 (the
"RECORD DATE"). Each Right entitles the registered holder to purchase from
the Company a unit (a "UNIT") consisting of one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $20.00 per share
(the "PREFERRED STOCK"), at a Purchase Price of $400.00 per Unit (the
"PURCHASE PRICE"), subject to adjustment. The description and terms of the
Rights are set forth in the Rights Agreement (the "RIGHTS AGREEMENT"), dated
as of October 17, 1997, between the Company and The Chase Manhattan Bank, as
Rights Agent (the "RIGHTS AGENT").
Initially, the Rights will be attached to all Common Stock certificates
representing shares outstanding as of the Record Date, and no separate Rights
Certificate will be distributed. The Rights will separate from the Common
Stock and a Distribution Date will occur upon the earlier of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "ACQUIRING PERSON") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding
shares of Common Stock (the "STOCK ACQUISITION DATE"), (ii) 10 business days
following the commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 15% or more of such
outstanding shares of Common Stock or (iii) 10 business days after the Board
of Directors of the Company determines that any Person or Persons have become
the Beneficial Owner of an amount of Common Stock that the Board of Directors
determines to be substantial (which amount will in no event be less than 10%
of the shares of Common Stock outstanding) and that (a) such Person or
Persons intend to cause the Company to repurchase the Common Stock
beneficially owned by such Person or Persons or to exert pressure against the
Company to take any action or enter into any transaction or series of
transactions with the intent or the effect of providing such Person or
Persons with short-term gains or profits under circumstances in which the
Board of Directors determines that the long-term interests of the Company and
its stockholders would not be served by taking such action or entering into
such transactions or series of transactions or (b) beneficial ownership by
such Person or Persons is reasonably likely to have a material adverse effect
on the business, competitive position, prospects, or financial condition of
the Company and its subsidiaries (an "ADVERSE PERSON"). Until the
Distribution Date, (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with
C-1
<PAGE>
and only with such Common Stock certificates, (ii) new Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference; and (iii) the surrender for transfer of any certificates for
Common Stock outstanding will also constitute the transfer of the Rights
associated with the Common Stock represented by such certificate.
The Rights Agreement provides that Stanley E. Fulton, and certain of his
transferees, donees or successors, who together will be beneficial owners of
more than 39.2% of the Common Stock of the Company outstanding on October 17,
1997, are excluded from the definition of "Acquiring Person." Mr. Fulton is
also excluded from the definition of "Adverse Person."
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on October 20, 2007, unless earlier redeemed
by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined
by the Board of Directors, only shares of Common Stock outstanding prior to
the Distribution Date will be issued with Rights.
In the event that (i) the Company is the surviving corporation in a
merger or combination with any Acquiring Person or any Adverse Person, or any
Associate or Affiliate of any Acquiring Person or Adverse Person, and its
Common Stock remains outstanding, (ii) any Acquiring Person or any Adverse
Person, or any Associate or Affiliate of any Acquiring Person or Adverse
Person, engages in one or more "self-dealing" transactions as set forth in
the Rights Agreement, (iii) an Acquiring Person becomes the beneficial owner
of 15% or more of the then outstanding shares of Common Stock (unless such
acquisition is made pursuant to a tender or exchange offer for all
outstanding shares of the Company, at a price determined by a majority of the
Continuing Directors of the Company who are not representatives, nominees,
Affiliates, or Associates of an Acquiring Person to be fair and otherwise in
the best interest of the Company and its stockholders), (iv) during such time
as there is an Acquiring Person or Adverse Person an event occurs that
results in such Acquiring Person's or Adverse Person's ownership interest
being increased by more than 1% (E.G., a reverse stock split or
recapitalization), or (v) the Board of Directors determines that a person is
an Adverse Person, each holder of a Right will thereafter have the right to
receive, upon exercise, Common Stock (or, in certain circumstances, cash,
property, or other securities of the Company), having a value equal to two
times the Exercise Price of the Right. The Exercise Price is the Purchase
Price times the number of shares of Common Stock associated with each Right
(initially, one). Notwithstanding any of the foregoing, following the
occurrence of any of the events set forth in this paragraph (the "Flip-In
Events"), all Rights that are, or (under certain circumstances specified in
the Rights Agreement) were, beneficially owned by any Acquiring Person or any
Adverse
C-2
<PAGE>
Person, or an Associate or Affiliate of any Acquiring Person or Adverse
Person, will be null and void. However, Rights are not exercisable following
the occurrence of any of the Flip-In Events set forth above until such time
as the Rights are no longer redeemable by the Company as set forth below.
For example, at an exercise price of $400 per Right, each Right not
owned by an Acquiring Person or an Adverse Person (or by certain related
parties) following an event set forth in the preceding paragraph would
entitle its holder to purchase Common Stock with a value of $800 (or other
consideration, as noted above) for $400. Assuming that the Common Stock had
a per share value of $400 at such time, the holder of each valid Right would
be entitled to purchase 2.0 shares of Common Stock for $400. Alternatively,
the Company could permit the holder to surrender each Right in exchange for
stock or cash equivalent to one share of Common Stock (with a value of $400)
without the payment of any consideration other than the surrender of the
Right.
In the event that following the Stock Acquisition Date, (i) the Company
is acquired in a merger or consolidation in which the Company is not the
surviving corporation (other than a merger that follows a tender offer that
the Board of Directors has found to be fair to the stockholders of the
Company, as described above) or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which have previously been voided as set forth above) will thereafter have
the right (a flip-over right) to receive, upon exercise of the Right, Common
Stock of the acquiring company having a value equal to two times the Exercise
Price of the Right.
The Purchase Price payable, and the number of Units of Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend on, or a subdivision, combination or reclassification of,
the Preferred Stock, (ii) if holders of the Preferred Stock are granted
certain rights or warrants to subscribe for Preferred Stock or convertible
securities at less than the current market price of the Preferred Stock, or
(iii) upon the distribution to holders of the Preferred Stock of evidences of
indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an
adjustment in cash will be made based on the market price of the Preferred
Stock on the last trading date prior to the date of exercise.
At any time until 10 days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.01
per Right. The ten day redemption period may be extended by the Board of
Directors so long as the Rights are still redeemable. Under certain
circumstances, the decision to redeem will require the
C-3
<PAGE>
concurrence of a majority of the Continuing Directors referred to below.
Immediately upon the action of the Board of Directors ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the $.01 redemption price.
The term "Continuing Director" means any member of the Board of
Directors of the Company who was a member of the Board prior to the adoption
of the Rights Plan and any person who is subsequently elected to the Board if
such person is recommended or approved by a majority of the Continuing
Directors, but will not include an Acquiring Person or any Adverse Person, or
an Affiliate or Associate of an Acquiring Person or Adverse Person, or any
representative of the foregoing entities.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders or to the Company, stockholders may,
depending upon the circumstances, recognize taxable income in the event that
the Rights become exercisable for Common Stock (or other consideration) of
the Company as set forth above.
Any of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by
the Board (in certain circumstances, with the concurrence of the Continuing
Directors) in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights (excluding the interest
of any Acquiring Person or any Adverse Person), or to shorten or lengthen any
time period under the Rights Agreement; provided that no amendment to adjust
the time period governing redemption will be made at such time as the Rights
are not redeemable.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company in certain circumstances. Accordingly, the existence of the Rights
may deter certain acquirors from making takeover proposals or tender offers.
However, the Rights are not intended to prevent a takeover, but rather are
designed to enhance the ability of the Board of Directors to negotiate with
an acquiror on behalf of all of the shareholders.
[The Rights Agreement between the Company and the Rights Agent specifying
the terms of the Rights, which includes as Exhibit B the Form of Rights
Certificate, is attached as an exhibit and incorporated by reference. The
foregoing description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.]*
- ---------------
* This paragraph to be included only in the Form 8-A to be filed with
the Commission.
C-4
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES,
AND RIGHTS OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
of
ANCHOR GAMING
Pursuant to Section 78.155 of the General Corporation Law of the State
of Nevada
The undersigned officers of Anchor Gaming (the "CORPORATION"), a
corporation organized and existing under the General Corporation Law of the
State of Nevada, in accordance with the provisions of Section 78.195 thereof,
DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Restated Articles of Incorporation of such Corporation, such Board of
Directors on August 26, 1997, adopted the resolutions set forth below
creating a series of 50,000 shares of Preferred Stock designated as
"Series A Junior Participating Preferred Stock":
That no shares of Series A Junior Participating Preferred Stock have
heretofore been issued.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Amended and Restated Certificate of Incorporation, a series of Preferred
Stock of the Corporation be and it hereby is created, and that the
designation and amount thereof and the voting powers, preferences, and
relative, participating, optional, and other special rights of the shares of
such series, and the qualifications, limitations, or restrictions thereof are
as follows:
(1) DESIGNATION AND AMOUNT. The shares of such series will be designated
as "Series A Junior Participating Preferred Stock" and the number of
shares constituting such series will be 50,000.
(2) DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of shares of Series A Junior Participating
Preferred Stock will be entitled to receive, when, as, and
if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on
the last day of March, June, September, and December in each year
(each such date being referred to as a "QUARTERLY DIVIDEND PAYMENT
DATE"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of
Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (i)
$0.01 or (ii) subject to the provision for adjustment set forth
1
<PAGE>
below, one thousand times the aggregate per share amount of all cash
dividends, and one thousand times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions
other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, par
value $.01 per share, of the Corporation (the "COMMON STOCK") since
the immediately preceding quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A
Junior Participating Preferred Stock. In the event the Corporation
at any time after October 20, 1997 (the "RIGHTS DECLARATION
DATE") (i) declares any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivides the outstanding Common
Stock, or (iii) combines the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which
holders of shares of Series A Junior Participating Preferred
Stock were entitled immediately prior to such event under CLAUSE
(ii) of the preceding sentence will be adjusted by multiplying
such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(b) The Corporation will declare a dividend or distribution
on the Series A Junior Participating Preferred Stock as provided
in SECTION 2(a) above immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in
shares of Common Stock); provided that, in the event no dividend or
distribution has been declared on the Common Stock during the period
between any quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the
Series A Junior Participating Preferred Stock will nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(c) Dividends will begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred
Stock from the Quarterly Dividend Payment Date next preceding the
date of issue of such shares of Series A Junior Participating
Preferred Stock, unless the date of issue of such shares is prior to
the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares will begin to accrue from the
date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Junior
Participating Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either
of which events such dividends will begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends will not bear interest. Dividends paid on the shares of
Series A Junior Participating Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and
payable on such shares will be allocated pro rata on a share-by-
2
<PAGE>
share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of
shares of Series A Junior Participating Preferred Stock entitled
to receive payment of a dividend or distribution declared thereon,
which record date will be no more than 30 days prior to the date
fixed for the payment thereof.
(3) VOTING RIGHTS.
(a) The holders of shares of Series A Junior Participating
Preferred Stock will have the following voting rights:
Subject to the provision for adjustment set forth below,
each share of Series A Junior Participating Preferred Stock will
entitled the holder to a number of votes on all matters submitted to
a vote of the stockholders of the Corporation equal to one thousand
times the number of votes per share to which shares of Common Stock
are entitled. In the event the Corporation at any time after the
Rights Declaration Date (i) declares any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivides the outstanding
Common Stock, or (iii) combines the outstanding Common Stock into a
smaller number of shares, then in each such case the number of votes
per share to which holders of shares of Series A Junior Participating
Preferred Stock were entitled immediately prior to such event will be
adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
(b) Except as otherwise provided in this Agreement or by law, the
holders of shares of Series A Junior Participating Preferred Stock and the
holders of shares of Common Stock will vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(c) (i) If at any time dividends on any Series A Junior
Participating Preferred Stock are in arrears in an amount equal to
six (6) quarterly dividends thereon, the occurrence of such
contingency will mark the beginning of a period (a "DEFAULT
PERIOD") that will extend until such time when all accrued and
unpaid dividends for all previous quarterly dividend periods and
for the current quarterly dividend period on all shares of Series A
Junior Participating Preferred Stock then outstanding have been
declared and paid or set apart for payment. During each default
period, all holders of preferred stock of the Corporation (the
"PREFERRED STOCK") (including holders of the Series A Junior
Participating Preferred Stock) with dividends in arrears in an
amount equal to six (6) quarterly dividends thereon, voting as a
class, irrespective of series, will have the right to elect two (2)
Directors.
3
<PAGE>
(ii) During any default period, such voting right of the
holders of Series A Junior Participating Preferred Stock may be
exercised initially at a special meeting called pursuant to SECTION
3(c)(iii) or at any annual meeting of stockholders, and thereafter
at annual meetings of stockholders, provided that such voting right
will not be exercised unless the holders of ten percent (10%) in
number of shares of Preferred Stock outstanding are present in
person or by proxy. The absence of a quorum of the holders of
Common Stock will not affect the exercise by the holders of
Preferred Stock of such voting right. At any meeting at which the
holders of Preferred Stock exercise such voting right initially
during an existing default period, they will have the right, voting
as a class, to elect Directors to fill such vacancies, if any, in
the Board of Directors as may then exist up to two (2) Directors
or, if such right is exercised at an annual meeting, to elect two
(2) Directors. If the number that may be so elected at any special
meeting does not amount to the required number, the holders of the
Preferred Stock will have the right to make such increase in the
number of Directors as is necessary to permit the election by them
of the required number. After the holders of the Preferred Stock
have exercised their right to elect Directors in any default period
and during the continuance of such period, the number of Directors
will not be increased or decreased except by vote of the holders of
Preferred Stock as provided herein or pursuant to the rights of any
equity securities ranking senior to or pari passu with the Series A
Junior Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock, during an existing
default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than ten percent
(10%) of the total number of shares of Preferred Stock outstanding,
irrespective of series, may request, the calling of a special
meeting of the holders of Preferred Stock, which meeting will
thereupon be called by the Chief Executive Officer, the Chief
Operating Officer, the President, a Vice-President, or the
Secretary of the Corporation. Notice of such meeting and of any
annual meeting at which holders of Preferred Stock are entitled to
vote pursuant to this SECTION 3(c)(iii) will be given to each
holder of record of Preferred Stock by mailing a copy of such
notice such holder at such holder's last address as it appears on
the books of the Corporation. Such meeting will be called for a
time not earlier than 20 days and not later than 60 days after such
order or request or in default of the calling of such meeting
within 60 days after such order or request, such meeting may be
called on similar notice by any stockholder or stockholders owning
in the aggregate not less than ten percent (10%) of the total
number of shares of Preferred Stock outstanding. Notwithstanding
the provisions of this SECTION 3(c)(iii), no such special meeting
will be called during the period within 60 days
4
<PAGE>
immediately preceding the date fixed for the next annual meeting of
the stockholders.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation if applicable, will
continue to be entitled to elect the whole number of Directors
until the holders of Preferred Stock have exercised their right to
elect two (2) Directors voting as a class, after the exercise of
which right (x) the Directors so elected by the holders of
Preferred Stock will continue in office until their successors have
been elected by such holders or until the expiration of the default
period, and (y) any vacancy in the Board of Directors may (except
as provided in SECTION 3(c)(ii)) be filled by vote of a majority of
the remaining Directors theretofore elected by the holders of the
class of stock that elected the Director whose office has become
vacant. References in this SECTION 3(c) to Directors elected by the
holders of a particular class of stock will include Directors
elected by such Directors to fill vacancies as provided in clause
(y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect
Directors will cease, (y) the term of any Directors elected by the
holders of Preferred Stock as a class will terminate, and (z) the
number of Directors will be such number as may be provided for in
the articles of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of SECTION 3(c)(ii) (such
number being subject, however, to change thereafter in any manner
provided by law or in the articles of incorporation or by-laws).
Any vacancies in the Board of Directors effected by the provisions
of CLAUSES (y) and (z) in the preceding sentence may be filled by a
majority of the remaining Directors.
Except as set forth herein, holders of Series A Junior Participating
Preferred Stock will have no special voting rights and their consent will not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
(4) CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating Preferred
Stock as provided in SECTION 2 are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared,
on shares of Series A Junior Participating Preferred Stock outstanding
have been paid in full, the Corporation will not
5
<PAGE>
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution, or winding up) to the Series A Junior
Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution, or winding up) with the Series A
Junior Participating Preferred Stock, except dividends paid ratably
on the Series A Junior Participating Preferred Stock and all such
parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution, or winding up) with the Series A
Junior Participating Preferred Stock, provided that the Corporation
may at any time redeem, purchase, or otherwise acquire shares of
any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation, or winding up) to the Series A Junior
Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Junior Participating Preferred Stock, or any shares of
stock ranking on a parity with the Series A Junior Participating
Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors)
to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, determines in good faith will result in fair
and equitable treatment among the respective series or classes.
(b) The Corporation will not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock
of the Corporation unless the Corporation could, under SECTION 4(a),
purchase or otherwise acquire such shares at such time and in such
manner.
(5) REACQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever will be retired and cancelled promptly after the
acquisition thereof. All such shares will upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock to be created by resolution
6
<PAGE>
or resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
(6) LIQUIDATION, DISSOLUTION, OR WINDING UP.
(a) Upon any liquidation (voluntary or otherwise), dissolution,
or winding up of the Corporation, no distribution will be made to the
holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution, or winding up) to the Series A Junior
Participating Preferred Stock unless, prior thereto, the holders of
shares of Series A Junior Participating Preferred Stock have received an
amount equal to $400,000.00, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the
date of such payment (the "SERIES A LIQUIDATION PREFERENCE"). Following
the payment of the full amount of the Series A Liquidation Preference,
no additional distributions will be made to the holders of shares of
Series A Junior Participating Preferred Stock unless, prior thereto, the
holders of shares of Common Stock have received an amount per share (the
"COMMON ADJUSTMENT") equal to the quotient obtained by dividing (i) the
Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted
as set forth in SECTION 6(c) to reflect such events as stock splits,
stock dividends, and recapitalizations with respect to the Common Stock)
(such number in CLAUSE (ii), the "ADJUSTMENT NUMBER"). Following the
payment of the full amount of the Series A Liquidation Preference and
the Common Adjustment in respect of all outstanding shares of Series A
Junior Participating Preferred Stock and Common Stock, respectively,
holders of Series A Junior Participating Preferred Stock and holders of
shares of Common Stock will receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio of the
Adjustment Number to 1 with respect to such Preferred Stock and Common
Stock, on a per share basis, respectively.
(b) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of
preferred stock, if any, that rank on a parity with the Series A Junior
Participating Preferred Stock, then such remaining assets will be
distributed ratably to the holders of such parity shares in proportion
to their respective liquidation preferences. In the event, however, that
there are not sufficient assets available to permit payment in full of
the Common Adjustment, then such remaining assets will be distributed
ratably to the holders of Common Stock.
(c) In the event the Corporation at any time after October 20, 1997
(i) declares any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivides the outstanding Common Stock, or (iii) combines
the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such
event will be adjusted by multiplying such Adjustment Number by a
fraction the numerator of which is the
7
<PAGE>
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(7) CONSOLIDATION, MERGER, ETC. In case the Corporation enters into any
consolidation, merger, combination, or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash, and/or any other property, then in any such case the shares of Series A
Junior Participating Preferred Stock will at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment set forth below) equal to one thousand times the aggregate amount
of stock, securities, cash, and/or any other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation at any time after October
20, 1997 (i) declares any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivides the outstanding Common Stock, or (iii) combines
the outstanding Common Stock into a smaller number of shares, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Junior Participating Preferred Stock
will be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(8) NO REDEMPTION. The shares of Series A Junior Participating
Preferred Stock will not be redeemable.
(9) AMENDMENT. The Restated Articles of Incorporation of the
Corporation will not be further amended in any manner that would materially
alter or change the powers, preferences, or special rights of the Series A
Junior Participating Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of a majority or more of the outstanding
shares of Series A Junior Participating Preferred Stock, voting separately as
a class.
(10) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock
may be issued in fractions of a share that entitle the holder, in proportion
to such holders fractional shares, to exercise voting rights, receive
dividends, participate in distributions, and to have the benefit of all other
rights of holders of Series A Junior Participating Preferred Stock.
8
<PAGE>
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and
do affirm the foregoing as true under the penalties of perjury this __ day of
October, 1997.
ANCHOR GAMING
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
The foregoing instrument was acknowledged before me by
____________________ and ____________________ on the ___ day of October 1997,
in the capacities indicated.
------------------------------------
(Notary)
9
<PAGE>
EXHIBIT 10.30
INDEMNITY AGREEMENT
INDEMNITY AGREEMENT, effective as of August 14, 1997, between Anchor
Gaming, a Nevada corporation (the "Company"), and Glen J. Hettinger (the
"Indemnitee").
RECITALS
It is essential to the Company to retain and attract as directors and
officers the most capable persons available.
Indemnitee is a director or officer of the Company.
Both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
public companies in the present environment.
The Articles of Incorporation and the Bylaws of the Company require the
Company to indemnify and advance expenses to its directors to the fullest
extent permitted by law and Indemnitee has been serving and continues to
serve as director or officer of the Company in part in reliance on such
Articles of Incorporation and Bylaws.
In recognition of Indemnitee's need for substantial protection against
personal liability in order to enhance Indemnitee's continued service to the
Company in an effective manner and Indemnitee's reliance on the Articles of
Incorporation and Bylaws of the Company, and in part to provide Indemnitee
with specific contractual assurance that the protection promised by such
Articles of Incorporation and Bylaws will be available to Indemnitee
(regardless of, among other things, any amendment to or revocation of such
Articles of Incorporation and Bylaws or any change in the composition of the
Board of Directors of the Company or acquisition transaction relating to the
Company), and in order to induce Indemnitee to continue to provide services
to the Company as a director or officer, the Company wishes to provide in
this Agreement for the indemnification of and the advancing of expenses to
Indemnitee to the fullest extent (whether partial or complete) permitted by
law and as set forth in this Agreement, and, to the extent insurance is
maintained, for the continued coverage of Indemnitee under the directors' and
officers' liability insurance policies of the Company.
THEREFORE, in consideration of the foregoing and of Indemnitee
continuing to serve the Company directly or, at its request, with another
enterprise, and intending to be legally bound, the parties agree as follows:
1. CERTAIN DEFINITIONS. For the purpose of this Agreement, the following
terms have the meanings indicated.
(a) "Change in Control" will be deemed to have occurred if (i) any
"person" (as such
1
<PAGE>
term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than (A) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, (B) an
entity owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, or (C) Stanley E. Fulton or any "person" including Stanley E.
Fulton, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of securities of the Company representing 20% or more of
the total voting power represented by the then outstanding Voting Securities
of the Company, (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of Directors of the
Company and any new director whose election by the Board of Directors or
nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds (2/3) of the entire Board of Directors of the Company
or of the nominating committee of the Board of Directors, and in either case
considering only the votes of directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of the Board of Directors of the Company, (iii) the stockholders of
the Company approve a merger or consolidation of the Company with any other
entity, other than a merger or consolidation that would result in the Voting
Securities of the Company outstanding immediately prior to such transaction
continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 80% of the
total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or (iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale of
disposition by the Company (in one transaction or a series of transactions)
of all or a majority all of the assets of the Company.
(b) "Expenses" include attorneys' fees and all other costs, excise
taxes, liabilities, expenses, and obligations reasonably paid or incurred in
conjunction with investigating, defending, being a witness in or
participating in (including on appeal), or preparing to defend, be a witness
in, or participate in any Proceeding relating to any Indemnifiable Event.
(c) "Indemnifiable Event" means any event or occurrence that takes
place either prior to or after the execution of this Agreement, related to
the fact that Indemnitee is or was a director or an officer of the Company,
or while a director or officer is or was serving at the request of the
Company as a director, officer, employee, trustee, agent, or fiduciary of
another corporation, partnership, joint venture, employee benefit plan,
trust, or other enterprise, or by reason of anything done or not done by
Indemnitee in any such capacity. The Indemnitee will be deemed to have been
serving at the request of the Company at any time that he or she serves as a
director, officer, employee, or agent of the Company or any subsidiary of the
Company or while serving as a trustee or fiduciary of any employee benefit
plan or trust relating to the Company and its subsidiaries.
(d) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, or any inquiry, hearing, or investigation, whether
conducted by or for the account of the Company or any other person, that
Indemnitee in good faith believes might lead to the institution
2
<PAGE>
of any such action, suit, or proceeding, whether civil, criminal,
administrative, investigative, or other.
(e) "Reviewing Party" means any appropriate person or body consisting
of a member or members of the Board of Directors of the Company or any other
person or body appointed by the Board of Directors (including the special,
independent counsel referred to in SECTION 3) who is not a party to the
particular Proceeding with respect to which Indemnitee is seeking
indemnification.
(f) "Voting Securities" means any securities of the Company that vote
generally in the election of directors.
2. AGREEMENT TO INDEMNIFY.
(a) Subject to SECTION 2(C), in the event Indemnitee was, is, or
becomes a party to, or witness or other participant in, or is threatened to
be made a party to, or witness or other participant in, a Proceeding by
reason of (or arising in part out of) an Indemnifiable Event, the Company
will indemnify Indemnitee to the fullest extent permitted by law, as soon as
practicable but in any event no later than thirty days after written demand
is presented to the Company, against any and all Expenses, judgments, fines,
penalties, and amounts paid in settlement (including all interest,
assessments, and other charges paid or payable in connection with or in
respect of such Expenses, judgments, fines, penalties, or amounts paid in
settlement) of such Proceeding and any federal, state, local, or foreign
taxes imposed on Indemnitee as a result of the actual or deemed receipt of
any payments under this Agreement. Without limiting the foregoing, subject
to SECTION 2(C), the Company will indemnify and hold harmless Indemnitee to
the fullest extent authorized or permitted under the Nevada Corporation Law
in effect at any time. Notwithstanding anything in this Agreement to the
contrary, and except as provided in SECTION 5, prior to a Change in Control
Indemnitee will not be entitled to indemnification pursuant to this Agreement
in connection with any Proceeding initiated by Indemnitee against the Company
or any director or officer of the Company unless the Company has joined in or
consented to the initiation of such Proceeding. If so requested by
Indemnitee, the Company will advance (within ten business days of such
request) any and all Expenses to Indemnitee (as "Expense Advance").
(b) Notwithstanding the foregoing, (i) the obligations of the Company
under SECTION 2(A) will be subject to the condition that the Reviewing Party
has not determined (in a written opinion, in any case in which the special,
independent counsel referred to in SECTION 3 is involved) that Indemnitee
would not be permitted to be indemnified under applicable law, and (ii) the
obligation of the Company to make an Expense Advance pursuant to SECTION 2(A)
will be subject to the condition that, if, when, and to the extent that the
Reviewing Party determines that Indemnitee would not be permitted to be so
indemnified under applicable law, the Company will be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; PROVIDED, HOWEVER, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under
3
<PAGE>
applicable law, any determination made by the Reviewing Party that Indemnitee
would not be permitted to be indemnified under applicable law will not be
binding and Indemnitee will not be required to reimburse the Company for any
Expense Advance until a final judicial determination (as to which all rights
of appeal have been exhausted or lapsed) is made with respect to such matter.
Indemnitee's obligation to reimburse the Company for Expense Advances will be
unsecured and no interest will be charged thereon. If there has not been a
Change in Control the Reviewing Party will be selected by the Board of
Directors, and if there has been such a Change in Control (other than a
Change in Control that has been approved by a majority of the Board of
Directors of the Company who were directors immediately prior to such Change
in Control), the Reviewing Party will be the special, independent counsel
referred to in SECTION 3. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part
under applicable law, Indemnitee will have the right to commence litigation
in any court in the State of Nevada having subject matter jurisdiction and in
which venue is proper seeking an initial determination by the court or
challenging any such determination by the Reviewing Party or any aspect of
such determination, and the Company hereby consents to service of process and
to appear in any such proceeding. Any determination by the Reviewing Party
will otherwise be conclusive and binding on the Company and Indemnitee.
(c) Indemnitee will not be entitled to any payment by the Company (i)
in connection with any fine or similar governmental imposition that the
Company is prohibited by applicable law from paying and that results from a
final, nonappealable order; (ii) the extent it is based upon or attributable
to Indemnitee in fact gaining a personal profit to which Indemnitee was not
legally entitled, including, without limitation, profits made from the
purchase and sale of equity securities of the Company that are recoverable by
the Company pursuant to Section 16(b) of the Exchange Act, and profits
arising from transactions in securities that were effected in violation of
Section 10(b) or Section 14(a) of the Exchange Act, including Rule 10b-5
and rule 14c-3 under the Exchange Act (iii) on account of remuneration paid
to the Indemnitee in violation of applicable law; or (iv) if it is finally
adjudged by a court of competent jurisdiction that such payment is unlawful
or that the Indemnitee acted in a manner that was knowingly fraudulent,
deliberately dishonest, or than constituted willful misconduct.
3. CHANGE IN CONTROL. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control that has been approved
by a majority of the Board of Directors of the Company who were directors
immediately prior to such Change in Control), then with respect to all
matters thereafter arising concerning the rights of Indemnitee to indemnify
payments and Expense Advances under this Agreement or any other agreement or
under applicable law or the Articles of Incorporation or ByLaws of the
Company now or hereafter in effect relating to indemnification for
Indemnifiable Events, the Company will seek legal advance only from special,
independent counsel selected by Indemnitee and approved by the Company (which
approval will not be unreasonably withheld or delayed), and who has not
otherwise performed services for the Company or the Indemnitee (other than in
connection with such matters) within the last five years. Such independent
counsel will not include any person who, under the applicable standards of
4
<PAGE>
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement. Such counsel, among the other
things, will render its written opinion to the Company and Indemnitees as to
whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable
fees of the special, independent counsel referred to above and to indemnify
fully such counsel against any and all expenses (including attorneys' fees),
claims, liabilities, and damages arising out of or relating to this Agreement
or the engagement of such special, independent counsel pursuant to this
Agreement.
4. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING THIS AGREEMENT.
The Company will indemnify Indemnitee against any and all expenses (including
attorneys' fees), and, if requested by Indemnitee, will (within ten business
days of such request) advance such expenses to Indemnitee that are incurred
by Indemnitee in connection with any claim asserted against or action brought
by Indemnitee for (a) indemnification or advance payment of Expenses by the
Company under this Agreement or any other agreement or under applicable law
or the Articles of Incorporation or Bylaws of the Company now or hereafter in
effect relating to indemnification for Indemnifiable Events or (b) recovery
under any directors' and officers' liability insurance policies maintained by
the company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment, or insurance
recovery, as the case may be.
5. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of
the Expenses, judgments, fines, penalties, and amounts paid in settlement of
a Proceeding but not, however, for all of the total amount thereof, the
Company will nevertheless indemnify Indemnitee for the full portion thereof
to which Indemnitee is entitled. Moreover, notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all Proceedings
relating in whole or in part to an Indemnifiable Event or in defense of any
issue or matter therein, including dismissal without prejudice, Indemnitee
will be indemnified against all Expenses incurred in connection therewith.
6. DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF, AND PRESUMPTIONS. It
will be a defense to any action brought by Indemnitee against the Company to
enforce this Agreement (other than an action brought to enforce a claim for
Expenses incurred in defending a Proceeding in advance of its final
disposition where the required undertaking has been rendered to the Company)
that Indemnitee has not met the standards of conduct that make it permissible
under the Nevada General Corporation Law for the cCompany to indemnify
Indemnitee for the amount claimed. In connection with any determination by
the Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified under this Agreement, the burden of proving such a defense will
be on the Company. Neither the failure of the Company (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action by Indemnitee that
indemnification of the claimant is proper under the circumstances because he
or she has met the applicable standard of conduct set forth in the Nevada
General Corporation Law, nor an
5
<PAGE>
actual determination by the Company (including its Board of Directors,
independent legal counsel, or its stockholders) that Indemnitee had not met
such applicable standard of conduct, will be a defense to the actions or
create a presumption that Indemnitee has not met the applicable standard of
conduct. For purposes of this Agreement, the termination of any claim,
action, suit, or proceeding, by judgment, order, settlement (whether with or
without court approval), or conviction, or upon a plea of nolo contendere, or
its equivalent, will not create a presumption that Indemnitee did not meet
any particular standard of conduct or have any particular belief or that a
court has determined that indemnification is not permitted by applicable law.
7. NON-EXCLUSIVITY. The rights of Indemnitee under this Agreement
will be in addition to any other rights Indemnitee may have under the
Articles of Incorporation or Bylaws of the Company or the Nevada General
Corporation Law or otherwise. To the extent that a change in the Nevada
General Corporation law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under
the Articles of Incorporation or Bylaws of the Company or this Agreement, the
parties to this Agreement agree that Indemnitee will enjoy under this
Agreement the greater benefits so afforded by such change. No change in the
Articles of Incorporation or Bylaws of the Company or in the Nevada General
Corporation law subsequent to the date of this Agreement will have the effect
of limiting or eliminating the indemnification available under this
Agreement. If any change in any applicable law, statute, or rule diminishes
the power of the Company to indemnify Indemnitee, such change, except to the
extent otherwise required by law, statute, or rule to be applied to this
Agreement, will have no effect on this Agreement or the parties' rights and
obligations under this Agreement.
8. LIABILITY INSURANCE. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee will be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
9. PERIOD OF LIMITATIONS. No legal action will be brought and no
cause of action will be asserted by or on behalf of the Company or any
affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors, or personal or legal representatives after the expiration of two
years from the date of accrual of such cause of action, or such longer period
as may be required by state law under the circumstances, and any claim or
cause of action of the Company or its affiliates will be extinguished and
deemed released unless asserted by the timely filing of a legal action within
such period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action, such shorter period will
govern.
10. AMENDMENT OF THIS AGREEMENT. No supplement, modification, or
amendment of this Agreement will be binding unless executed in writing by
both of the parties to this Agreement. No waiver of any of the provisions of
this Agreement will be deemed or will constitute a waiver of any other
provision of this Agreement (whether or not similar) nor will such waiver
constitute a continuing waiver.
6
<PAGE>
11. SUBROGATION. In the event of payment under this Agreement, the
Company will be surrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who will execute all documents required and will
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
12. NO DUPLICATION OF PAYMENTS. The Company will not be liable under
this Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Bylaw, or otherwise) of the amounts otherwise
indemnifiable under this Agreement.
13. SETTLEMENT OF CLAIMS. The Company will not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any
action or claim effected without the written consent of the Company. The
Company will not settle any action or claim in any manner that would impose
any penalty or limitation on Indemnitee without Indemnitee's written consent.
Neither the Company nor Indemnitee will unreasonably withhold their consent
to any proposed settlement. The Company will not be liable to indemnify
Indemnitee under this Agreement with regard to any judicial award if the
Company was not given a reasonable and timely opportunity, at its expense, to
participate in the defense of such action.
14. BINDING EFFECT. This Agreement will be binding upon and inure to
the benefit of and be enforceable by the parties and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation, or otherwise to all or a majority of the business or
assets of the Company, spouses, heirs and personal and legal representatives.
The Company will require and cause any successor (whether direct or indirect
by purchase, merger, consolidation, or otherwise) to all, substantially all,
or a substantial part, of the business or assets of the Company, by written
agreement in form and substance satisfactory to Indemnitee, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession
had taken place. This Agreement will continue in effect regardless of
whether Indemnitee continues to serve as a director or officer of the Company
or of any other enterprise at the request of the Company.
15. SEVERABILITY. The provisions of this Agreement will be severable
in the event that any of the provisions of this Agreement (including any
provision within a single section, paragraph, or sentence) is held by a court
of competent jurisdiction to be invalid, void, or otherwise unenforceable,
and the remaining provisions will remain enforceable to the fullest extent
permitted by law. Furthermore, to the fullest extent possible, the provisions
of this Agreement (including, without limitation, each portion of this
Agreement containing any provision held to be invalid, void, or otherwise
unenforceable, that is not itself invalid, void, or unenforceable) will be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal, or unenforceable.
7
<PAGE>
16. GOVERNING LAW. This Agreement will be governed by and construed
and enforced in accordance with the laws of the State of Nevada applicable to
contracts made and to be performed in such State without giving effect to the
principles of conflicts of laws.
17. CONSTRUCTION. The parties to this Agreement agree that it is their
intent to grant broad indemnity rights to Indemnitee, that this Agreement
will be broadly construed to give effect to such intent, and that no rule of
public policy requiring strict construction of agreements to indemnify will
apply to this Agreement.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the 14th day of August, 1997.
ANCHOR GAMING
By: /s/Stanley E. Fulton
------------------------------------------
Name: Stanley E. Fulton
Title: Chairman of the Board and C.E.O.
/s/Glen J. Hettinger
------------------------------------------
Glen J. Hettinger, Indemnitee
8
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Anchor Coin
DD Stud, Inc.
C. G. Investments, Inc.
Colorado Grande Enterprises, Inc.*
Green Mountain Enterprises, Inc.
Anchor Gaming Canada, Inc.
* Colorado Grande Enterprises, Inc. is 80% controlled by Anchor Gaming.
Approximately 50% of this subsidiary is held through C.G. Investments, Inc.
and the remaining 30% is held by Anchor Gaming.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ANCHOR GAMING CONSOLIDATED BALANCE
SHEETS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 AND
THE ANCHOR GAMING CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 73,187,295
<SECURITIES> 0
<RECEIVABLES> 8,977,254
<ALLOWANCES> 0
<INVENTORY> 3,869,496
<CURRENT-ASSETS> 88,039,680
<PP&E> 94,791,189
<DEPRECIATION> 0
<TOTAL-ASSETS> 245,133,543
<CURRENT-LIABILITIES> 33,590,398
<BONDS> 0
0
0
<COMMON> 137,584
<OTHER-SE> 244,995,959
<TOTAL-LIABILITY-AND-EQUITY> 245,133,543
<SALES> 0
<TOTAL-REVENUES> 231,931,781
<CGS> 0
<TOTAL-COSTS> 125,700,450
<OTHER-EXPENSES> (3,434,315)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,811
<INCOME-PRETAX> 109,439,835
<INCOME-TAX> 41,039,938
<INCOME-CONTINUING> 68,399,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,399,897
<EPS-PRIMARY> 5.36
<EPS-DILUTED> 5.20
</TABLE>
